965 F. Supp. 2d 1141
E.D. Cal.2013Background
- SAC EDM, a California electrical discharge machining company, and its president Folk, sued Hynes, HAI, and HCTF in California state court for various business-tort and contract-related claims.
- Hynes served as a consultant and mediator, and through HAI provided operating capital and management for SAC EDM since 2003 under an alleged partnership arrangement.
- Plaintiffs allege a scheme whereby Hynes and HAI manipulated leases, obtained judgments, and then purchased judgments at a discount while demanding full payment from SAC EDM.
- Defendants allegedly engaged in self-dealing, extending loans to SAC EDM, taking equipment, leasing it back at high rates, and misappropriating profits from purchases of SAC EDM assets.
- Hynes suggested life insurance arrangements where Folk and Hynes were beneficiaries; SAC EDM allegedly paid premiums and incurred loan-like charges, accruing benefit to Hynes via HAI.
- Plaintiffs filed the complaint on October 4, 2012; Defendants removed to this court and moved to dismiss under Rule 12(b)(6) and for transfer; the court granted in part and denied in part.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a fiduciary relationship existed to support a breach of fiduciary duty | Plaintiffs allege a partnership and shared profits/control | Defendants contend no enforceable contract created fiduciary duties | Claim survives; partnership alleged sufficient for fiduciary duties |
| Whether fraud/constructive fraud were pled with sufficient particularity and scienter | Fraud alleged by multiple acts; conspiracy implied | Rule 9(b) requires specific intent and detailed timing; lumping defendants insufficient | Fraud and constructive fraud dismissed with leave to amend |
| Whether intentional/negligent interference with prospective business advantage and tortious interference with contract are viable | Defendants interfered with existing contracts and business relationships | JRS Products bars tort claims arising from the same contract breach | Claims survive; not barred by JRS Products; allowed to proceed |
| Whether unjust enrichment is viable without a contract | Defendants benefited at SAC EDM’s expense | Unjust enrichment requires no contract; but some courts dispute standalone claim | Unjust enrichment claim may proceed |
| Whether declaratory relief is appropriate given other live claims | Clarify rights regarding enforcement of judgment | Relies on existing claims; uncertain; privilege considerations | Plaintiffs may obtain declaratory relief; not dismissed on the pleadings |
Key Cases Cited
- City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 68 Cal.App.4th 445 (Cal. Ct. App. 1998) (fiduciary duties arise from confidences in business relationships; partnership duties arise from profits and control)
- Connolly v. Bank of California, 36 Cal.App.3d 350 (Cal. Ct. App. 1973) (existence of partnership is a factual question inferred from conduct)
- Nelson v. Abraham, 29 Cal.2d 745 (Cal. 1947) (profit-sharing factors in determining partnership existence)
- Twombly v. Bell Atlantic Corp., 550 U.S. 544 (2007) (claims must be plausible, not merely possible; pleadings must show grounds for relief)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must state a plausible claim for relief and show more than mere speculation)
- Moore v. Kayport Package Express, Inc., 885 F.2d 531 (9th Cir. 1989) (Rule 9(b) specificity may be relaxed for corporate fraud; not shown here)
- Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993) (fraud pleadings require specifics of times, places, and methods)
- Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) (fraud pleadings require who/what/when/where/how)
- Swartz v. KPMG, LLP, 476 F.3d 756 (9th Cir. 2007) (fraud pleadings must inform each defendant of his role in the fraud)
- JRS Products, Inc. v. Matsushita Electric Corp. of Am., 115 Cal.App.4th 168 (Cal. Ct. App. 2004) (tort damages not allowed for breach of contract when conduct is essentially contractual)
- Rusheen v. Cohen, 37 Cal.4th 1048 (Cal. 2006) (litigation privilege applies to communications in judicial proceedings; limits tort liability for litigation-related acts)
- Paracor Financial, Inc. v. General Electric Capital Corp., 96 F.3d 1151 (9th Cir. 1996) (unjust enrichment not barred where contract exists but quasi-contract relief may be appropriate)
- Klein v. Chevron U.S.A., Inc., 202 Cal.App.4th 1342 (Cal. Ct. App. 2012) (unjust enrichment not available where enforceable contract governs rights)
- Durell v. Sharp HealthCare, 183 Cal.App.4th 1350 (Cal. Ct. App. 2010) (unjust enrichment viability and relationship to contract)
- Peterson v. Cellco P'ship, 164 Cal.App.4th 1583 (Cal. Ct. App. 2008) (recognizing unjust enrichment in California)