Edward Kendler v. Jahm Najafi

FILED
NOT FOR PUBLICATION
APR 29 2019
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
BILL McCAULEY and EDWARD D. No. 17-17196
KENDLER, sole trustee of Kendler
Family Trust, individually and on behalf of D.C. No. 2:16-cv-03461-SPL
all others similarly situated,
Plaintiffs-Appellants, MEMORANDUM*
v.
JAHM J. NAJAFI, husband; CHERYL
NAJAFI, wife; KEVIN M. WEISS,
husband; ELIZABETH S. WEISS, wife;
DAVID P. FRANKE, husband;
STEPHANIE M. RANKIN FRANKE,
wife; JAMES D. STAUDOHAR, husband;
KATHLEEN M. STAUDOHAR, wife;
SCOTT WILEY, husband; GAIL E.
WILEY, wife,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Arizona
Steven Paul Logan, District Judge, Presiding
Argued and Submitted April 18, 2019
San Francisco, California
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
Before: FERNANDEZ, BEA, and N.R. SMITH, Circuit Judges.
Plaintiffs—a proposed class of Xhibit, Inc. shareholders—appeal the district
court’s order dismissing of their complaint alleging Defendants—Xhibit directors,
officers, and board members—violated Arizona securities laws. We have
jurisdiction under 28 U.S.C. § 1291, and we reverse and remand.
1. The district court erred in dismissing Plaintiffs’ Arizona Revised Statute
section 44-1991(A)(2) claims on the ground that Plaintiffs failed to allege that
Defendants’ fraud resulted in the purchase or sale of securities. Plaintiffs allege
that they purchased Xhibit stock during the period when the alleged fraud
occurred, and therefore the fraud was “in connection with” the purchase or sale of
securities. See Ariz. Rev. Stat. § 44-1991(A). That is sufficient to survive a motion
to dismiss, because section 44-1991(A)(2) does not require Plaintiffs to prove (or
allege) that the purchase or sale was caused by or made in reliance on the alleged
fraudulent statements or omissions. Aaron v. Fromkin, 994 P.2d 1039, 1042 (Ariz.
Ct. App. 2000); Rose v. Dobras, 624 P.2d 887, 892 (Ariz. Ct. App. 1981).
2. The district court erred when it dismissed Plaintiffs’ section 44-1991(A)(3)
claims when it concluded that Plaintiffs’ claims were a “literal recitation of the
statute itself.” Although Plaintiffs’ complaint recites the statutory language, that
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recitation is followed immediately by Plaintiffs’ allegation that Defendants’
fraudulent scheme encompassed misconduct beyond alleged misrepresentations
and omissions, including the merger itself, termination of Xhibit’s profitable
business lines, delayed SEC filings, and undisclosed negotiations. Thus, Plaintiffs’
complaint alleged a factual basis to support their claims under section
44-1991(A)(3). See Albers v. Edelson Tech. Partners L.P., 31 P.3d 821, 825-26
(Ariz. Ct. App. 2001) (“We are required to view the complaint as a whole to
determine whether a claim for fraud has been stated.”).
3. Because the district court erred in dismissing Plaintiffs’ section 44-1991
claims, it erred in dismissing Plaintiffs’ section 44-1999(B) control liability claims
for failure to plead a primary violation. See E. Vanguard Forex, Ltd. v. Ariz. Corp.
Comm’n, 79 P.3d 86, 100 (Ariz. Ct. App. 2003).
4. The district court abused its discretion when it denied Plaintiffs leave to
amend. Plaintiffs identified and argued additional claims of fraud in their
opposition to Defendants’ motion to dismiss, demonstrating that amendment would
not necessarily be futile. Additionally, the district court did not find bad faith,
undue delay, or prejudice; nor had Plaintiffs previously requested leave to amend.
See Sisseton-Wahpeton Sioux Tribe v. United States, 90 F.3d 351, 355 (9th Cir.
1996) (per curiam); see also Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d
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1048, 1052 (9th Cir. 2003) (per curiam) (“Dismissal with prejudice and without
leave to amend is not appropriate unless it is clear on de novo review that the
complaint could not be saved by amendment.”).
REVERSED AND REMANDED.1
1
We need not reach Defendants’ arguments that we may affirm the district
court’s decision on alternate grounds. See United States v. Johnson Controls, Inc.,
457 F.3d 1009, 1023 (9th Cir. 2006), abrogated on other grounds by United States
ex rel. Hartpence v. Kinetic Concepts, Inc., 792 F.3d 1121 (9th Cir. 2015) (en
banc).
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