ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS
INTRODUCTION
This action involves a dispute over a real estate purchase-and-lease-back agreement. The complaint asserts ten state-law claims including for breach of the lease agreement and various business torts. All ten claims are asserted against Alliant Credit Union; two are also asserted against Stanley Abrams. This order finds that six of the claims against defendant Alliant are preempted by federal law. Therefore, Al-liant’s motion to dismiss claims four and six through ten is Granted. Furthermore, Alliant’s motion to dismiss claim five is also Granted because the allegations therein against Alliant (as opposed to Abrams) fail to satisfy the requirements of Rule 9(b). On the other hand, Alliant’s motion to dismiss claims one through three is Denied. Finally, defendant Abrams’ motion to dismiss the allegations in claims four and five against him is Denied.
STATEMENT
This suit arises from Kaiperm Federal Credit Union’s alleged breach of a purchase-and-lease-back agreement with plaintiff 625 3rd Street Associates. The office space was for the credit union’s store. Approximately one year after entering the lease agreement, Kaiperm ceased paying rent under the lease when the National Credit Union Administration initiated involuntary liquidation of Kaiperm. This case involves a dispute over the lease agreement.
Plaintiff is in the real estate business. In May 2007, plaintiff executed a letter of intent to purchase an eight-million dollar Oakland property from Kaiperm in exchange for Kaiperm’s execution of a fifteen-year lease on the property to commence upon the close of escrow. Plaintiff performed due diligence to review Kai-perm’s publicly-available financials. All seemed sunny. Plaintiff felt Kaiperm was adequately capitalized and financially stable.
Between May 2007 and August 2007 Kaiperm and its CEO, defendant Stanley Abrams, allegedly informed plaintiff that Kaiperm was in good financial standing, that the publicly available on-line financial statements were accurate, that Kaiperm had the wherewithal to perform on the lease agreement, and that the eight-million dollar purchase price to be paid by plaintiff to Kaiperm was to be used to improve Kaiperm’s liquidity. All this was untrue, or so it is alleged.
In May 2008 Kaiperm’s attorney informed plaintiff that Kaiperm was in financial trouble, that Alliant would be merging with it, and that Alliant wished to negotiate a deal regarding the remaining lease obligations. In June 2008, Alliant informed plaintiff that all subsequent dealings should be made solely with Alliant. Plaintiff alleges that Kaiperm’s board of directors delegated its oversight functions and responsibilities to Alliant’s representatives at that time. In August 2008, after plaintiff and Alliant were unable to negotiate an agreement on a buy-out price for the lease, Alliant informed the NCUA that it would not merge with Kaiperm unless the NCUA placed Kaiperm in liquidation and excused any remaining obligations under the lease.
On September 26, 2008, the NCUA placed Kaiperm in involuntary liquidation and executed a purchase-and-assumption agreement by which Alliant was given Kai-perm’s business and assets and liabilities, with the exception of the lease. On October 23, 2008, the NCUA notified plaintiff that it was repudiating any remaining lease obligations under the purchase-and-lease-back agreement. In plaintiffs view, it has been the victim of a plot to unload the property, to extract eight million dollars from plaintiff, and then to extinguish the stream of rent payments via the neat trick of NCUA repudiation.
Plaintiff filed this lawsuit in Alameda County Superior Court on December 30, 2008, against defendants Alliant and Abrams. As stated, plaintiff asserts ten state-law claims for breach of contract and business torts. Alliant removed the case to federal court, and a motion to remand was denied. Defendants Alliant and Abrams each now bring a motion to dismiss. 1
ANALYSIS
1. Defendant Alliant Credit Union’s Motion.
A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint.
See Parks Sch. of Bus. v. Symington,
A. Preemption and De Facto Merger (Claims Four and Six through Ten).
Six of the ten claims in this action presuppose that a de facto merger took place between Alliant and Kaiperm. These claims are, respectively, rescission, breach of lease, breach of contractual warranties, breach of the covenant of good faith and fair dealing, bad faith denial of existence of contract, and intentional misrepresentation. In each of these claims, plaintiff seeks to impose the alleged liabilities arising from the purchase-and-leaseback agreement on Alliant as Kaiperm’s successor under the state-law doctrine of de facto merger.
Plaintiff does not dispute the NCUA’s statutory authority to administer a credit union’s assets and liabilities during a liquidation proceeding. Instead, plaintiff argues that Alliant is liable on the lease because Kaiperm had already merged into Alliant, and therefore ceased to exist, before the NCUA intervened. While plaintiff concedes that no statutory merger ever took place between Kaiperm and Alliant, plaintiff maintains that these two credit unions nevertheless merged under the de facto merger doctrine.
The de facto merger doctrine has been applied in situations where the assets of one company are transferred to a successor without an exchange of consideration that could be used to offset the merging company’s liabilities. A five-factor test governs whether a transaction cast in the form of a transfer of assets actually achieved the same practical result as a merger. This test considers whether: (1) the consideration exchanged for the assets was solely in stock; (2) the successor continued the same enterprise after the transfer; (3) the shareholders of the merging company became shareholders of the successor; (4) the merging company was liquidated; and (5) the successor assumed the liabilities necessary to carry on the business of the merging company.
See, e.g., Marks v. Minnesota Mining & Mfg. Co.,
As stated, plaintiff seeks to impose the alleged liabilities arising from the purchase-and-lease-back agreement on Alliant as Kaiperm’s successor. Alliant contends that the de facto merger test, hence the doctrine of successor liability, is preempted because it would result in a conflict between state and federal law governing the merger activity of federally insured credit unions. Specifically, Alliant argues that plaintiffs action, which is based on the state law theory of de facto merger, is preempted because it explicitly conflicts with NCUA’s statutory responsibilities and regulations. NCUA regulations provide, inter alia, that “[a] federally-insured credit union must have the prior written approval of the NCUA before merging with any other credit union.” 12 C.F.R. § 708b.101(b).
The NCUA was established by Congress under the Federal Credit Union Act, 12 U.S.C. 1752a, to fulfill the “public mission” of credit unions. Credit Union Member
In the present case, claims four and six to ten necessarily challenge the NCUA’s express repudiation of the lease by seeking to keep the lease alive through a state-law de facto merger. In addition, no merger is valid, de facto or otherwise, unless pre-approved by the NCUA. 12 C.F.R. 708b.l01(b). This is a two-fold direct conflict with federal law and is barred by federal preemption. Thus claims four and six to ten must be dismissed as preempted.
B. Contractual Interference (Claims One through Three).
By contrast, plaintiff’s interference with contractual relations, inducement to breach contract, and interference with prospective economic advantage claims are not preempted for the following reasons. These claims attack Alliant’s conduct between May 2008 and September 26, 2008— ie., before NCUA entered the picture. Allegedly, Alliant intentionally “operated Kaiperm in such a way as to warrant the NCUA’s intervention,” thereby breaching the parties’ lease agreement. Alliant argues that these tortious interference claims should be dismissed because they are preempted by federal regulations and the First Amendment, and because they fail to state a plausible claim for relief. For the following reasons, each of these attacks fail and Alliant’s motion to dismiss plaintiffs first three claims is denied.
These three claims are not preempted. The claims do not confront the later actions undertaken by the NCUA. Rather, plaintiffs interference claims challenge Al-liant’s conduct between May 2008 and September 2008 before the NCUA’s intervention. According to the complaint, Alliant operated Kaiperm in such a way as to thwart its strategic stability plan and to weaken its financial status to the point that the NCUA would be forced to place Kai-perm in liquidation. Plaintiff seeks to demonstrate that, but for Alliant’s conduct, Kaiperm’s level of capitalization would not have warranted intervention by the NCUA.
These claims are not preempted or barred by the NCUA’s statutory powers because the claims attack Alliant’s conduct between May 2008 and September 2008, but do not attack the NCUA’s intervention. If, for example, an officer looted a company to the point of insolvency, the officer could not claim his crime was immune from state law challenge merely because the insolvency opened the way for federal liquidators to step in.
Contrary to Alliant’s assertion, the First Amendment does not protect interference with contracts via looting or mismanaging a company to the point that seeking federal assistance is required. Plaintiffs interference claims only allege that Alliant deliberately mismanaged Kaiperm, which in turn led to a drop in its capitalization, intervention by the NCUA, and the eventual repudiation of the lease agreement. These claims are not premised on any communication between Alliant and the NCUA and thus are not barred by the First Amendment.
Claim one (interference with contractual relations), moreover, states plausible grounds for relief under Rule 12(b)(6). The elements of interference with contrac
The complaint alleges facts sufficient to support the contractual interference torts. Furthermore, this order rejects Alliant’s argument that, because mismanagement cannot constitute interference under California law, plaintiff has pleaded himself out of court by alleging Alliant’s succession to Kaiperm through the de facto merger theory. A plaintiff can plead two claims in the alternative. Alliant’s motion to dismiss these claims is accordingly denied without prejudice to a summary judgment motion after an opportunity for discovery.
Plaintiff pleads enough facts to satisfy the elements of this tort. There is no dispute that there was a valid contract for the lease between plaintiff and Kaiperm. The complaint alleges that Alliant offered to buy out the lease from plaintiff as early as May 2008, which satisfies the second element of the tort — that the defendant have knowledge of the contract. The complaint also alleges that Alliant operated Kaiperm in such a way as to, in effect, drive Kaiperm into liquidation and thus manipulate a repudiation of the lease obligation. Again, by way of example, if an officer looted a company and drove it into the arms of liquidators, his actions could not be immunized merely because the liquidators had the duty to step in.
With respect to claim two (inducement to breach contract), it too states plausible grounds for relief under Rule 12(b)(6). The elements for inducement to breach contract are similar to those for interference with contractual relations. Under California law, this tort requires that the defendant “had knowledge of the existence of the contract and intended to induce a breach thereof, that the contract was in fact breached resulting in injury to plaintiff, and the breach and resulting injury must have been proximately caused by defendant’s unjustified or wrongful conduct.”
Freed v. Manchester Serv., Inc.,
This order rejects Alliant’s argument that its actions were “justified” as a defense to the inducement to breach claim since they were protected by the First Amendment. In California, a complaint can only be dismissed if the court finds “justification on the face of the complaint for defendant’s interference with plaintiffs contractual relations.” As previously discussed, plaintiffs inducement to breach claim is based on Alliant’s alleged mismanagement of Kaiperm. The First Amendment privilege would likely shield Alliant’s communications with the NCUA, but as the complaint attacks Alliant’s mis
With respect to claim three (interference with prospective economic advantage), it also alleges plausible grounds for relief under Rule 12(b)(6). The elements of interference with prospective economic advantage in California are: “(1) a relationship between the plaintiff and some third party with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) a wrongful act, apart from the interference itself, by the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.”
Salma v. Capon,
Plaintiffs complaint asserts all the necessary facts to plausibly satisfy each element of this claim. The lease agreement between plaintiff and Kaiperm was of probable future economic benefit to plaintiff. As discussed above, Affiant knew of the lease agreement and that the lease agreement was actually disrupted by the NCUA’s intervention. Affiant, however, attacks this claim with the argument that plaintiff does not identify any conduct on the part of Affiant that is “wrongful by some legal measure” other than the interference itself. This argument is rejected. The wrongful conduct can be reasonably inferred from the complaint. The complaint alleges that Affiant had a malicious intent to weaken Kaiperm to the point of compelling the NCUA to place it in liquidation and thus acquire Kaiperm’s assets without any lease obligations. This satisfies both the improper motive and the “outside the realm of legitimate business transactions” tests for wrongful acts as outlined in Della Penna. Finally, the complaint meets the requisite plausibility requirement for causation under Rule 12(b)(6) under the analysis applied in regard to the interference with contractual relations claim.
Accordingly, this order denies Affiant's motion to dismiss plaintiffs contractual interference claims.
C. Fraudulent Concealment (Claim Five).
Rule 9(b) requires that in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally. A pleading is sufficient under Rule 9(b) if it “identifies the time, place, and nature of the alleged fraudulent activities.” In cases of corporate fraud, however, the pleading standard is relaxed since the circumstances may make it difficult to attribute particular fraudulent conduct to each de
A claim for fraudulent concealment in California requires knowing concealment or non-disclosure by a defendant with the intent to defraud, which induces justifiable reliance and causes injury to the plaintiff.
Hoey v. Sony Electronics, Inc.,
As discussed earlier in this order, Alliant’s succession to Kaiperm’s liabilities on a theory of de facto merger liability is barred by federal preemption. The complaint, however, suggests a claim against Alliant for fraud preceding the purchase of the property in August 2007. This order therefore examines Alliant’s potential liability for fraudulent concealment irrespective of Kaiperm’s liabilities.
The complaint contains several allegations that Kaiperm and Abrams fraudulently concealed the financial health of Kaiperm at the time of the purchase-and-lease-back agreement. It attempts to pin these allegations on Alliant with the single statement that “Alliant had plans to take over Kaiperm’s operations, which included the above-described scheme to avoid any assumption of Lease responsibilities.” The complaint, however, fails to allege: (1) non-disclosure or misrepresentation by Alliant; or (2) a theory under which Alliant would have a duty to disclose. Given such omissions, this order finds that the complaint fails to state a claim for fraudulent non-disclosure by Alliant under the heightened pleading standard of Rule 9(b). Furthermore, the problem here is not just a failure to allege facts with adequate particularity—the allegations against Alliant are wholly inconsistent with the basic fact pattern. This claim goes to the parties’ alleged fraudulent concealment before the purchase-and-lease-baek agreement in August 2007. Since Alliant did not become involved until several months after the lease agreement, leave to amend would be futile. Alliant’s motion to dismiss this claim is thus granted without leave to amend.
2. Defendant Stanley Abrams’ Motion.
A. Personal Liability.
As a threshold matter, Abrams disputes whether he may be held personally liable for his conduct while acting as the CEO of Kaiperm. Abrams acknowledges that while corporate officers will not be held vicariously liable for torts in which they do not actively participate, of which they have no knowledge, or to which they have not consented, they may be held liable for participating in or authorizing a corporation’s torts.
Frances T. v. Vill. Green Owners Ass’n,
The parties do not dispute the legal standard, but rather the application of that standard to the facts. Abrams may be held personally liable for fraudulent conduct based on his acts and omissions as a corporate officer.
Plaintiffs fraud claims are required to meet the heightened pleading standard under Rule 9(b) as set forth above. Plaintiff and Abrams treat claims four and five jointly. Given the similarity of these claims, this order will do the same.
In its fourth claim, plaintiff alleges that Abrams intentionally misrepresented Kaiperm’s financial condition and intentions in order to induce plaintiff to enter into contract. The elements of an intentional misrepresentation claim are: (1) defendant misrepresents material facts; (2) with knowledge of the falsity of the representations or the duty of disclosure; (3) with intent to defraud or induce reliance; (4) which induces justifiable reliance by the plaintiff; (5) to his or her detriment.
Hahn,
Abrams challenges claims four and five with respect to the specificity of their factual allegations, and argues that proof of justifiable reliance would be impossible. This order need not consider Abrams’s additional challenge to allegations of intent — plaintiff has satisfied Rule 9(b) by alleging intent generally in its complaint.
Abrams also seeks to invoke the parol evidence rule to bar plaintiffs fraud claim by limply referring to the integration clause of the purchase-and-leaseback agreement. Abrams’s argument is stillborn. Evidence of fraud and misrepresentation are well-established exceptions to the parol evidence rule. Evidence extrinsic to the contract is always permissible to prove fraud in the inducement of the contract pursuant to both common and statutory law. The integration clause has no effect in contract actions alleging fraud.
Plaintiffs complaint specifically alleges that, in the months prior to the execution of the purchase-and-lease-back agreement, Abrams affirmatively and falsely represented that Kaiperm was financially sound, that it intended to lease the property for fifteen years, and that NCUA had approved of the transaction (Compl. ¶ 56). Allegedly, Abrams concealed the true facts of the situation: that Kaiperm was financially unsound, mismanaged, and unlikely to uphold its lease obligations, that it engaged in risky investment practices that could jeopardize its liquidity profile, and that it had not obtained NCUA approval for the transaction.
These facts are disputed and readily permit reasonable differences in opinion. Plaintiff has identified a specific defendant, the content of the fraud, and a time frame in which the alleged fraud occurred. The pleadings suffice to give Abrams notice of the content of the claim under Rule 9(b).
Abrams also argues that it would be “impossible” for plaintiff to prove that it justifiably relied on his alleged statements when deciding to enter into the purchase- and-lease-back agreement.
First,
Abrams argues that even if plaintiff relied on Abrams’s statements, such reliance was not justified. Abrams referred to his alleged statements as expressions of opinion, rather than statements of fact, and cited to case law providing that a misrepresentation claim ordinarily cannot be grounded on opinions. This argument is unavailing at the pleading stage. Whether Abrams’s statements were or were not expressions of opinion is
Second, Abrams argues that plaintiff did not rely on his statements as a matter of law. As the Ninth Circuit explained:
Reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiffs conduct which altered his or her legal relations, and when without such misrepresentation or nondisclosure he or she would not, in all reasonable probability, have entered into the contract or other transaction.... The question whether a party detrimentally relied on the misrepresentation of another party is properly left to a jury. Except in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiffs reliance is reasonable is a question of fact.
City Solutions v. Clear Channel Commc’ns, Inc.,
Abrams pointed to the exculpatory clause, section 3.5(b) of the purchase- and-lease-back agreement, to cut short plaintiffs reliance claim. This demonstration is without merit. California decisions consistently have held that liability for intentional torts such as fraud and misrepresentation simply cannot be waived by means of an exculpatory agreement. Such contract provisions neither bar misrepresentation claims nor establish as a matter of law that reliance upon a Abrams’s misrepresentations was not justifiable.
McClain v. Octagon Plaza, LLC,
CONCLUSION
This order finds that plaintiffs claims of intentional misrepresentation, rescission, breach of lease, breach of contractual warranties, breach of the covenant of good faith and fair dealing, and bad faith denial of the existence of contract (claims four, six, seven, eight, nine, and ten, respectively) are preempted by federal regulation. For the foregoing reasons, Alliant’s motion to dismiss these claims is Granted without further leave to amend.
In contrast, this order finds that plaintiffs contractual interference claims (claims one through three) are barred neither by federal regulations nor by the First Amendment. It also finds that plaintiff has stated the necessary facts for relief under Rule 12(b)(6). For these reasons, Alliant’s motion to dismiss claims one through three is Denied.
Plaintiffs fraudulent concealment claim (claim five) against Alliant fails to satisfy the heightened pleading standard of Rule 9(b). As discussed above, any attempt to reconcile plaintiffs claim with the facts in the pleadings would be futile. Accordingly, Alliant’s motion to dismiss plaintiffs claim of fraudulent concealment (claim five) against Alliant is Granted without further leave to amend.
Plaintiffs intentional misrepresentation and fraudulent concealment claims (claims four and five) against Abrams state a plausible claim for relief under Rule 12(b)(6). Accordingly, Abrams’s motion to dismiss these claims is Denied.
There has been too much motion practice in this case. It is time to allow discov
IT IS SO ORDERED.
Notes
. Specifically, the complaint asserts the following claims: (1) interference with contractual relations; (2) inducement to breach contract; (3) interference with prospective economic gain; (4) intentional misrepresentation; (5) fraudulent concealment; (6) rescission; (7) breach of lease; (8) breach of contractual warranties; (9) breach of the covenant of good faith and fair dealing; (10) bad faith denial of the existence of contract.
. Unless indicated otherwise, internal citations are omitted from all quoted authorities.