Ovation Finance Holdings 2 LLC v. Chicago Title Insurance Company ( 2020 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 OVATION FINANCE HOLDINGS 2 Case No.: 19cv2031-LAB (AHG) LLC, et al. 12 ORDER GRANTING IN PART Plaintiffs, 13 MOTION TO DISMISS; AND v. 14 ORDER GRANTING LEAVE TO CHICAGO TITLE COMPANY, et 15 AMEND PENDING MOTION FOR al. LEAVE TO FILE AMENDED 16 Defendants. COMPLAINT 17 [DOCKET NUMBER 24.] 18 19 20 Plaintiffs were numerous investors in a lending enterprise which the 21 Complaint calls the ANI Loan Program. This case is related to 19cv1628, SEC v. 22 Champion-Cain, and to 19cv2129, Allred v. Chicago Title. All three cases concern 23 the same lending enterprise. Cris Torres and Gina Champion-Cain have pled guilty 24 in the criminal cases 20cr2114 and 20cr2115, respectively. 25 Defendant Chicago Title filed a motion to dismiss, or in the alternative to stay 26 this action. (Docket no. 24.) Chicago Title argues that Plaintiffs have failed to join 27 necessary parties, that Plaintiffs’ RICO claims are barred under the Private 28 Securities Litigation Reform Act (PSLRA), and that the Complaint does not state a 1 claim against Defendant Chicago Title Insurance Company. This motion is fully 2 briefed and ready for adjudication. Plaintiffs also filed a motion (Docket no. 33) 3 seeking leave to add two new claims, but that motion does not affect the motion to 4 dismiss. The hearing date on that motion is November 23, so briefing on that 5 motion is not due soon. 6 Although the Court is deciding similar motions in Allred, the two complaints 7 are different, and the Court is treating each case separately. In particular, the 8 Complaint in this case is much more robust, and supported by substantial exhibits. 9 The motions to dismiss are different as well. For example, Defendants in Allred 10 moved to dismiss fraud claims for failure to plead them with particularity, but the 11 motion to dismiss in this case does not raise such an argument. The fact that the 12 Court has made a particular ruling in a related case does not necessarily mean the 13 same ruling will be made in all cases. 14 Dismissal for Failure to Join a Necessary Party 15 Under Fed. R. Civ. P. 19(a)(1), a party must be joined when either of two 16 conditions is met. Under Rule 19(a)(1)(A), a person is a necessary party if, “in that 17 person's absence, the court cannot accord complete relief among existing parties 18 . . . .” Under Rule 19(a)(1)(B), a person is a necessary party if he claims an interest 19 relating to the action and if adjudicating the action in that person’s absence may 20 lead to either of two scenarios: either adjudication may as a practical matter impair 21 the absent person’s ability to protect his interest, or the person’s absence may 22 result in an existing party’s incurring multiple or inconsistent obligations. If a 23 necessary party has not been joined as required, the Court must order that that 24 person be made a party. See Rule 19(a)(2). But if joinder is not feasible, the Court 25 must determine whether the action should proceed among the existing parties or 26 be dismissed. See Washington v. Daley, 173 F.3d 1158, 1169 (9th Cir. 1999); 27 Rule 19(b). 28 / / / 1 “It has long been the rule that it is not necessary for all joint tortfeasors to be 2 named as defendants in a single lawsuit.” Temple v. Synthes Corp., 498 U.S. 5, 7 3 (1990) (per curiam); see also Fed. R. Civ. P. 19 advisory committee’s note to 1966 4 amend. (explaining that “a tortfeasor with the usual ‘joint-and-several’ liability is 5 merely a permissive party to an action against another with like liability”). 6 Motions to dismiss for failure to join a necessary party are bought under Fed. 7 R. Civ. P. 12(b)(7). The moving party bears the burden of persuasion. Makah 8 Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir.1990). The movant must first 9 show that the party is necessary. If so, the Court must determine whether the 10 absent person is indispensable, such that in “equity and good conscience” the suit 11 should be dismissed. Id. “The inquiry is a practical one and fact specific . . . .” Id. 12 In ruling on the motion, the Court accepts as true the allegations in the complaint, 13 drawing all reasonable inferences in Plaintiffs’ favor. See Paiute-Shoshone Indians 14 of Bishop Community of Bishop Colony, Cal. v. City of Los Angeles, 637 F.3d 993, 15 996 n.1 (9th Cir. 2011). 16 Chicago Title argues that Champion-Cain as well as ANI Development, LLC 17 and American National Investments, Inc. (collectively, “ANI”) are necessary parties 18 who cannot be joined because of the litigation bar in the SEC action, 19cv1628, 19 SEC v. Champion-Cain. Developments in that action have affected the Court’s 20 analysis of this issue. After the motion to dismiss was filed, the receiver in the SEC 21 action sought Court approval to bring claims against Chicago Title. The Court has 22 held a hearing but has not yet authorized the receiver to bring that action. The 23 proposed action may involve the receiver asserting claims on behalf of ANI. If that 24 were to happen, and if both actions were to go forward at once, Chicago Title would 25 be at risk of conflicting judgments. 26 Chicago Title also argues that Kim Peterson and Kim Funding are necessary 27 parties, but cannot be joined because both are in bankruptcy. It argues that Kim 28 Peterson and Kim Funding are necessary because they participated substantially 1 in inducing Plaintiffs to invest. Champion-Cain is an alleged tortfeasor along with 2 Chicago Title. Whether Kim Peterson and Kim Funding are at fault is not clearly 3 alleged, though the Complaint does make clear they were substantially involved in 4 dealing with investors and drafting agreements. The Complaint suggests in 5 passing that Kim Peterson, an investor, was duped by Champion-Cain. (See 6 Compl., ¶¶ 96–97.) 7 Most of the Complaint’s allegations describe Kim Funding’s financial and 8 other business arrangements with Ovation and Banc of California in facilitating 9 their investment in the lending platform, rather than their involvement with the 10 scheme more generally. The Complaint does not treat either Kim Peterson or Kim 11 Funding as deeply and knowingly involved in any deception. 12 As to Kim Peterson and Kim Funding, the Court finds Chicago Title has not 13 met its burden of showing they are necessary parties. While Champion-Cain is a 14 joint tortfeasor, it does not appear her involvement in this action is necessary 15 either. It appears, however, that ANI will be a necessary party if the receiver’s 16 motion for authorization to proceed against Chicago Title is granted. As discussed 17 at the hearing on the receiver’s motion, the Court was considering staying actions 18 against Chicago Title, in order to facilitate an orderly disposition of the receiver’s 19 actions. Bearing in mind that this case is still in the pleading stage, and that the 20 Court has yet to rule on the receiver’s motion, the Court finds it unnecessary to 21 stay the case at this time. 22 It is likely the Court will rule on the receiver’s motion in case 19cv1628 well 23 before ruling on Plaintiffs’ pending motion for leave to amend. Once that happens, 24 the appropriateness of a stay for failure to join ANI will be clearer. Because this 25 case is still in the pleading stage and is likely to remain so for some time, a stay is 26 unnecessary at this time. 27 / / / 28 / / / 1 Dismissal for Failure to State a Claim 2 A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. 3 Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). “Factual allegations must be 4 enough to raise a right to relief above the speculative level . . . .” Bell Atlantic Corp. 5 v. Twombly, 550 U.S. 544, 555 (2007). “[S]ome threshold of plausibility must be 6 crossed at the outset” before a case is permitted to proceed. Id. at 558 (citation 7 omitted). The well-pleaded facts must do more than permit the Court to infer “the 8 mere possibility of misconduct”; they must show that the pleader is entitled to relief. 9 Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). 10 When determining whether a complaint states a claim, the Court accepts all 11 allegations of material fact in the complaint as true and construes them in the light 12 most favorable to the non-moving party. Cedars-Sinai Medical Center v. National 13 League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir. 2007) (citation 14 omitted). The Court does not weigh evidence or make credibility determinations. 15 Acosta v. City of Costa Mesa, 718 F.3d 800, 828 (9th Cir. 2013). The Court, 16 however, is “not required to accept as true conclusory allegations which are 17 contradicted by documents referred to in the complaint,” and does “not . . . 18 necessarily assume the truth of legal conclusions merely because they are cast in 19 the form of factual allegations.” Warren v. Fox Family Worldwide, Inc., 328 F.3d 20 1136, 1139 (9th Cir. 2003) (citations and quotation marks omitted). 21 To meet the ordinary pleading standard and avoid dismissal, a complaint 22 must plead “enough facts to state a claim to relief that is plausible on its face.” 23 Twombly, 550 U.S. at 570. 24 New allegations in opposition to a Rule 12(b)(6) motion to dismiss may be 25 considered when deciding whether to grant leave to amend, but are not considered 26 when ruling on the motion itself. See Schneider v. Cal. Dep't of Corr. & Rehab., 27 151 F.3d 1194, 1197 n.1 (9th Cir. 1998). 28 / / / 1 Dismissal of RICO Claims 2 Plaintiffs bring two Racketeer Influenced and Corrupt Organizations Act 3 (RICO) claims under 18 U.S.C. § 1962(c) and (d), respectively. In 1995, Congress 4 enacted the Private Securities Litigation Reform Act (PSLRA), which amended the 5 RICO statute to provide that securities fraud cannot serve as a predicate act for a 6 RICO claim. See 18 U.S.C. § 1964(c) (“[N]o person may rely upon any conduct 7 that would have been actionable as fraud in the purchase or sale of securities to 8 establish a violation of section 1962.”) Congress’ focus was on eliminating treble 9 damages for securities fraud claims, which it reasoned existing securities laws 10 already provided an adequate remedy for. See Bald Eagle Area Sch. Dist. v. 11 Keystone Fin’l Inc., 189 F.3d 321, 327 (3d Cir. 1999); MJK Partners, LLC v. 12 Husman, 877 F. Supp. 2d 596, 603 (N.D. Ill. 2012). In other words, the PSLRA 13 does not immunize securities fraud, but merely prevents a plaintiff from using RICO 14 to sue for such activities. 15 The bar applies even if the plaintiff would lack standing to sue under federal 16 securities law. Howard v. America Online, Inc., 208 F.3d 741, 749–50 (9th Cir. 17 2000). This is consistent with Congress’ purpose in enacting the PSLRA. If existing 18 securities law, which Congress thought was adequate, does not provide a 19 particular remedy to a particular plaintiff, the logical implication is that Congress 20 did not intend to grant a remedy in those circumstances. Allowing plaintiffs to use 21 RICO as an end run around limitations on claims under existing securities laws 22 would defeat the PSLRA’s purpose. 23 The PSLRA bar proscribes the use as a RICO predicate of any conduct that 24 would have been actionable as securities fraud, even if pled as some other claim, 25 such as wire fraud or mail fraud. See Swartz v. KPMG, LLC, 401 F. Supp. 2d 26 1146, 1151 (W.D. Wash. 2004), aff’d in relevant part, 476 F.3d 756, 761 (9th Cir. 27 2007). See also Bald Eagle, 189 F.3d at 327. A plaintiff cannot avoid the PSLRA 28 bar by relying on only some parts of an overall scheme as RICO predicate acts, 1 and avoiding those parts connected with the sale or purchase of securities. See 2 id., 189 F.3d at 330. See also Davies v. GetFugu, Inc., 2010 WL 11597458, at *3 3 (C.D. Cal., Aug. 26, 2010) (citation omitted) (explaining that when determining 4 whether PSLRA bar applies, courts consider the allegedly fraudulent scheme as a 5 whole). 6 Plaintiffs briefly argue that Banc of California’s and Ovation’s lines of credit, 7 which were intended to finance the ANI Loan Program, did not involve the 8 purchase or sale of a security. Alternatively, they argue that the Court cannot 9 decide this issue as a matter of law at the pleading stage. 10 At the pleading stage, the Court accepts all allegations of material fact in the 11 complaint as true and construes them in the light most favorable to the non-moving 12 party. Cedars-Sinai Medical Center v. National League of Postmasters of U.S., 497 13 F.3d 972, 975 (9th Cir. 2007) (citation omitted). The Court does not weigh evidence 14 or make credibility determinations. Acosta v. City of Costa Mesa, 718 F.3d 800, 15 828 (9th Cir. 2013). 16 In general, when determining what amounts to a security for purposes of 17 federal securities laws, “form should be disregarded for substance and the 18 emphasis should be on [the] economic reality . . . .” United Housing Found. v. 19 Forman, 421 U.S. 837, 848 (1975). The Supreme Court has made clear, however, 20 that federal securities laws are intended to be read liberally, recognizing the 21 “virtually limitless scope of human ingenuity” devised by those who seek the 22 investment of third parties. SEC v. Rubera, 350 F.3d 1084, 1089 (9th Cir. 2003) 23 (quoting Reves v. Ernst & Young, 494 U.S. 56, 60–61 (1990)). The definition of 24 “security” is not restrictive, but “encompass[es] virtually any instrument that might 25 be sold as an investment.” Id. at 1090 (citing Reves, 494 U.S. at 61). Securities 26 include, among other things, investment contracts, which are defined as any 27 “contract, transaction or scheme whereby a person invests his money in a common 28 / / / 1 enterprise and is led to expect profits solely from the efforts of the promoter or third 2 party.” Id. (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946)). 3 The Complaint alleges that from 2012 to 2019, Defendants defrauded 4 Plaintiffs and other investors by means of the ANI Loan Program. (Compl., ¶¶ 1– 5 2, 19, 22.) Supposedly, Plaintiffs’ investment funds would be deposited in escrow 6 accounts with Chicago Title, on behalf of liquor license applicants who could not 7 afford to keep large amounts of money in escrow as long as was typically required. 8 (Id., ¶ 20.) See Cal. Bus. & Prof. Code § 24074 (escrow provisions). Champion- 9 Cain purportedly knew and worked with an attorney who could send large numbers 10 of such applicants her way. (Compl., ¶ 21.) After the license application was 11 granted, the licensee-applicant was supposed to wire the funds plus interest to 12 Chicago Title, for deposit into the escrow account, after which the lender’s money 13 would be returned with their share of the interest. (Id., ¶ 31.) The arrangement 14 supposedly was designed to minimize risk. (Id., ¶ 23.) This all entailed a great 15 deal of work, which the investors depended on Champion-Cain, Chicago Title, ANI, 16 and others to carry out. Graphics in the Complaint illustrate how the process was 17 supposed to work. (Id., ¶¶ 32.) Plaintiffs also attach exhibits to the Complaint 18 showing among other things agreements they made and relied on. 19 In fact, the Complaint alleges, none of what was promised actually 20 happened. Instead, Champion-Cain and her confederates took the money and 21 Chicago Title profited from the fees it received. The Complaint includes a graphic 22 illustrating how the scheme actually functioned. (Id., ¶ 91.) 23 The Complaint’s allegations describe the Lending Platform (as it was 24 supposed to have functioned)1 as a common enterprise. Investors handed their 25 26 27 1 The fact that the Lending Platform was nonexistent does not change the analysis. Whether fraud amounts to securities fraud depends on what a defendant purports 28 1 money over to Defendants, who would do all the work, including finding a steady 2 stream of licensee-applicants, conducting other necessary transactions and 3 business, and eventually paying the investors. The only part of the process 4 investors were involved in was selecting particular licensee-applicants’ accounts 5 to fund, from a list compiled by Defendants. Other than that, their role was passive. 6 Had the ANI Loan Program functioned as promised, Plaintiffs’ return would 7 have depended on the managerial skill and efforts of Chicago Title and others 8 involved with the Loan Program. By investing their money in the Lending Platform, 9 Plaintiffs were placing substantial trust in Defendants and others involved in the 10 program to do the work to exercise their skill in order to minimize any risk and to 11 turn as large a profit as possible. (See, e.g., Compl., ¶¶ 75; 203.) 12 It is also significant that many investors were invited to take part in the 13 Lending Platform, which required no particular expertise about liquor licenses, 14 escrow agreements, or anything else, nor did it require any effort on their part. 15 Their role, essentially, was to front the money, for which they would reap a return. 16 See United States v. Farris, 614 F.2d 634, 641 (9th Cir. 1979) (distinguishing the 17 case from Amfac Mortg. Corp. v. Ariz. Mall of Tempe, Inc., 583 F.2d 426 (9th Cir. 18 1978) in part on the fact that in Amfac the promissory note was offered to one 19 sophisticated investor only). 20 This brings the ANI Loan Program within the definition of a security. See 21 Farris, 614 F.2d at 641 (citing definitions of securities). Because Plaintiffs’ two 22 RICO claims are premised on transactions that are actionable as securities fraud, 23 the PSLRA bars them. 24 / / / 25 26 27 52 F.3d 667, 670 (7th Cir. 1995) (“[I]t is the representations made by the promoters, not their actual conduct, that determine whether an interest is an investment 28 1 Although Plaintiffs are not necessarily estopped by the Court’s decisions in 2 related cases, it bears mention that case 19cv1628 represents the SEC’s efforts 3 to bring securities fraud claims against Champion-Cain and others in connection 4 with these same transactions. Torres has pled guilty in case 20cr2114 to 5 conspiracy to commit securities fraud, and Champion-Cain has pled guilty in case 6 20cr2115 to (among other things) securities fraud and conspiracy to commit 7 securities fraud. To treat the Lending Platform investments as something other 8 than securities would be anomalous. 9 Possibility of Amendment 10 Plaintiffs’ opposition to the motion to dismiss describes Banc of California’s 11 and Ovation’s lines of credit in different terms than the Complaint does. For 12 example, the Complaint says Ovation’s rate of return was to have been 10% 13 (Compl., ¶ 33) and it would remain the owner of the loaned principal. (Id., ¶¶ 34, 14 40.) It also alleges that Banc of California was to be named as a third-party 15 beneficiary with an ownership interest in the escrowed funds. (Id., ¶¶ 54, 61–62.) 16 The Complaint speaks of the money in the accounts as belonging to the lenders, 17 and of the low risk to lenders’ principal. (Id., ¶ 36.) In their opposition, Plaintiffs 18 describe Ovation’s and Banc of California’s involvement as that of commercial 19 lenders only, though the opposition is silent as to other investors. 20 While Banc of California and Ovation may have been commercial lenders 21 vis-à-vis Kim Funding, their understanding was that the escrow accounts would be 22 held in their own names, and they would remain owners of the funds in the 23 accounts. They are not suing on the notes,2 but for alleged securities fraud by 24 which their funds were drained. Their claims against Chicago Title arise from its 25 involvement in the alleged fraud. While these two Plaintiffs may have been 26 27 2 Because Kim Funding is in bankruptcy, their ability to recover on the note is 28 1 engaged in commercial lending, the Complaint asks that for purposes of the RICO 2 claims they be treated as cheated investors. Even if they were to amend to 3 distinguish their roles as suggested in the opposition, however, it is clear that the 4 overarching scheme as alleged in the Complaint amounted to securities fraud. 5 Their RICO claims would still be subject to the PSLRA bar. See Bald Eagle, 189 6 F.3d at 330. 7 Failure to Make Allegations against Chicago Title Insurance Company 8 This order has been referring to Chicago Title as a single entity, as the 9 Complaint does. But in fact, it is two entities: Chicago Title Company (“CTC”), a 10 California corporation, and Chicago Title Insurance Company (“CTIC”), a Florida 11 corporation. (Compl., ¶¶ 13–15.) 12 Chicago Title points out that the Complaint treats both Chicago Title entities 13 as a single unit, without either differentiating between them or alleging facts to 14 show that the separate existence of each one should be disregarded. Its motion 15 appears to accept that CTC is the intended Defendant, but argues that no 16 allegations are made against CTIC. 17 Plaintiffs summarily allege that the two are “agents, alter egos, and 18 instrumentalities of one another,” based on their common ownership, sharing of 19 the same officers, use of the same or interconnected websites, and coordinated 20 operation. (Id., ¶ 16.) Generalized and conclusory allegations of agency or joint 21 venture unsupported by facts are insufficient. See Williams v. Yamaha Motor Co. 22 Ltd., 851 F.3d 1015, 1025 n.5 (9th Cir. 2017) (citing Iqbal, 556 U.S. at 678) 23 (rejecting as insufficient plaintiff’s conclusory allegations that defendants were 24 each other’s agents and were responsible for each other’s acts). 25 Plaintiffs’ opposition to the motion to dismiss makes more robust allegations 26 of a unity between CTC and CTIC. New allegations in opposition to a Rule 12(b)(6) 27 motion to dismiss may be considered when deciding whether to grant leave to 28 / / / 1 amend, but are not considered when ruling on the motion itself. See Schneider v. 2 Cal. Dep't of Corr. & Rehab., 151 F.3d 1194, 1197 n.1 (9th Cir. 1998). 3 While the new allegations are not enough to show that their separate 4 existence should be disregarded, they could suggest CTC and CTIC acted in 5 concert, or that one was part of the other. The Complaint needs to make these 6 allegations, however. The Court or either Defendant should be able to read the 7 Complaint and understand what is being alleged against which Defendant. If the 8 two are to be treated as one, the Complaint must allege facts showing why, and 9 cannot merely conclude that they were each other’s agents, alter egos, joint 10 venturers, or the like. 11 Continuing Jurisdiction 12 The Complaint relies on federal question jurisdiction, based on the two RICO 13 claims, and supplemental jurisdiction as to the state law claims. The parties are 14 not completely diverse. Although this is a putative class action, it does not rely on 15 jurisdiction under the Class Action Fairness Act (CAFA), and it is questionable 16 whether the requirements for CAFA jurisdiction are present here. 17 With the dismissal of the two federal claims, however, that jurisdictional basis 18 disappears. While the Court’s continued exercise of supplemental jurisdiction over 19 state law claims is discretionary under 28 U.S.C. § 1367(c), the Supreme Court 20 has made clear that when federal claims are dismissed before trial, supplemental 21 state law claims should ordinarily be dismissed as well. Carnegie-Mellon Univ. v. 22 Cohill, 484 U.S. 343, 350 n.7 (1988) (describing this as the rule to be followed in 23 the usual case, even though it is not mandatory). 24 Conclusion and Order 25 The motion to dismiss (Docket no. 24) is GRANTED IN PART. Plaintiffs’ two 26 RICO claims are DISMISSED WITHOUT LEAVE TO AMEND. Claims against 27 Chicago Title Insurance Company are DISMISSED WITHOUT PREJUDICE for 28 failure to state a claim against it. 1 No later than 21 calendar days from the date this order _is issued, 2 ||Plaintiffs may amend their motion for leave to amend, updating the proposed 3 complaint to omit RICO claims and to correct pleading defects this order has 4 |lidentified. The amended motion should use the same briefing date and time. 5 6 7 IT IS SO ORDERED. 8 Dated: September 23, 2020 9 ( iM A. JB wy 10 Honorable Larry Alan Burns 14 Chief United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28