GEC US 1 LLC, et al., Plaintiffs, v. FRONTIER RENEWABLES, LLC, et al., Defendants. FRONTIER RENEWABLES, LLC, Counterclaim Plaintiff, v. ACTIV SOLAR GMBH, et al., Counterclaim Defendants.
Case No.: 16-cv-1276 YGR
United States District Court, Northern District of California
September 7, 2016
Re: Dkt. Nos. 85, 87, 89, 90, 91, 93
Plaintiffs GEC US 1 LLC, AS (Wright) LLC, and Activ Solar Holdings (US) Inc. (collectively, “plaintiffs“) bring this action against defendants Frontier Renewables LLC (“Frontier“), Balduin Hesse, Reinhard Hesse, Frederick Franks, Tom Fitzgerald, and Lance McKinley (collectively, “defendants“) arising out of plaintiffs’ and Frontier‘s contractual relationships with respect to their jointly owned venture, Wright Solar, LLC, which was formed to develop a power generation project (the “Wright Project“). Plaintiffs allege that Frontier breached its contractual obligations under the various agreements related to the Wright Project, and that all defendants have improperly asserted control over and ownership of Wright Solar amounting to conversion and civil theft under California law. Frontier asserts counterclaims arising out of alleged breaches of the same agreements against plaintiffs and Activ Solar GmbH, Activ Solar (UK) Ltd., Green Evolution Capital LLP, Colin Bent, Kaveh Ertefai, and Kim Koehler (collectively, “non-plaintiff counterclaim defendants“). Based thereon, plaintiffs and Frontier seek declaratory and injunctive relief resolving
Currently pending before the Court are the parties’ motions to dismiss the first amended complaint (Dkt. No. 70, “FAC“) and the first amended counterclaims (Dkt. No. 84, “FACC“). Also pending is plaintiffs’ motion to enforce compliance with the Court‘s order requiring ongoing disclosures. Having carefully considered the papers submitted and the pleadings in this action, oral argument held August 30, 2016, and for the reasons discussed below, the Court ORDERS as follows:
- Defendants’ motion to dismiss the FAC (Dkt. No. 85) is GRANTED IN PART;
- Activ Solar GmbH‘s motion to dismiss the FACC (Dkt. No. 87), the individual counterclaim defendants’ motion to dismiss the FACC (Dkt. No. 90), and the UK counterclaim defendants’ motion to dismiss the FACC (Dkt. No. 91) are GRANTED for lack of personal jurisdiction WITH LEAVE TO AMEND;
- Plaintiffs’ motion to dismiss the FACC (Dkt. No. 89) is GRANTED IN PART; and
- Plaintiffs’ motion to enforce compliance with Court order (Dkt. No. 93) is DENIED.
I. FACTUAL AND PROCEDURAL BACKGROUND
This case centers on the parties’ alleged breaches of their respective obligations related to the Wright Project. Plaintiffs claim that Frontier began to breach its contractual obligations in November 2015. (FAC ¶ 54.) Frontier failed to provide status updates to plaintiffs regarding the Wright Project (id.) and denied plaintiffs access to Wright Solar‘s books and records (id. ¶¶ 39–50). Frontier does not dispute its failure to comply with the contractual provisions cited by plaintiffs in their complaint. Frontier, however, asserts it no longer has such obligations because plaintiffs have failed to make required payments, constituting material breaches of the agreements (FACC ¶¶ 120–27), and plaintiffs otherwise have defaulted by virtue of their parent company‘s insolvency proceedings in Austria (id. ¶¶ 95–99). Frontier takes the position that, under the terms of the agreements, it is now the sole owner of Wright Solar as a result of the Austrian insolvency proceedings. (Id.) Plaintiffs vehemently disagree, alleging that defendants’ assertion of complete ownership amounts to conversion and civil theft. (FAC ¶¶ 89–103.)
The Court now recounts the salient allegations relevant to the instant motions:
Plaintiffs are three related entities: GEC US 1, LLC (“GEC“), AS (Wright) LLC (“AS (Wright)“), and Activ Solar Holdings (US) Inc. (“ASH“). Non-plaintiff counterclaim defendants include three entities related to plaintiffs: Activ Solar GmbH (“Activ GmbH“), Activ Solar UK, Ltd. (“Activ UK“), and Green Evolution Capital, LLP (“Green Evolution“). Additionally, Frontier brings certain counterclaims against three officers and/or representatives of the counterclaim defendant entities in their individual capacities: Kaveh Ertefai, Colin Bent, and Kim Koehler (the “individual counterclaim defendants,” collectively). (FACC ¶¶ 15–17.)
Given the import of the relationships among the counterclaim defendants to the motions to dismiss, the Court provides the below charts reflecting the relationships as alleged in the FACC.
Plaintiffs:1
| Full Name | Short Name | Relationships to Other Parties |
|---|---|---|
| GEC US 1, LLC | GEC |
|
| AS (Wright) LLC | AS (Wright) |
|
| Activ Solar Holdings (US) Inc. | ASH |
|
Non-Plaintiff Counterclaim Defendants:3
| Full Name | Short Name | Relationship to Other Parties |
|---|---|---|
| Activ Solar GmbH | Activ GmbH |
|
| Activ Solar (UK) Ltd. | Activ UK |
|
| Green Evolution Capital LLP | Green Evolution |
|
| Kaveh Ertefai | Ertefai |
|
| Colin Bent | Bent |
|
| Kim Koehler | Koehler |
|
Current Corporate Structure:4
Defendant and counterclaimant Frontier is a limited liability company “engaged in utility-scale solar [PV] power plant developments in California.” (FACC ¶ 19.) In March 2012, Frontier formed Wright Solar as its sole member to develop the Wright Project. (Id. ¶ 22.)5 In April 2012, AS (Wright) through its then-managing member ASH entered into three agreements with Frontier: (1) a membership interest purchase agreement (“MIPCA“) by which Frontier sold seventy-five (75) percent of its interest in Wright Solar to AS (Wright); (2) an LLC Agreement, inter alia, appointing Frontier as the initial manager of Wright Solar and vesting decision-making authority in the majority owner; and (3) a development services agreement (“DSA“) setting forth the development services Frontier would provide to Wright Solar as its manager. (See FAC, Exhs. 3, 2, 4, respectively; FACC, Exhs. A, B, C, respectively.) The only agreement between Frontier and Activ GmbH – the alleged ultimate parent company of all counterclaim defendants – related to the Wright Project is a May 2013 indemnity agreement (the “indemnity agreement“). (FACC ¶ 30.) Pursuant to the indemnity agreement, ASH, AS (Wright), and Activ GmbH each separately indemnified Frontier for a multi-million dollar bond necessary to develop the Wright Project. (Id. ¶ 31.)
Defendants Balduin Hesse, Reinhard Hesse, Frederick Franks, Tom Fitzgerald, and Lance McKinley (the “individual defendants“) are members and officers of Frontier. (FAC ¶¶ 9–13.) Specifically, the individual defendants are Frontier‘s chief executive officer, chief developer, chief financial officer, vice president of development, and general counsel, respectively. (Id.)
B. Activ GmbH Insolvency Proceedings Following Asset Transfer
As mentioned above, ASH transferred to GEC its 100% interest in AS (Wright) on or around December 2015. (FACC ¶ 43.) Frontier claims that the transfer from ASH to GEC was fraudulently performed to evade counterclaim defendants’ creditors, including Frontier. (Id.) Frontier was
- November 11, 2015 – Bent emails Balduin Hesse (Frontier CEO) with details of a proposed transfer agreement. Bent represents that, despite the sale, “[t]he transaction team will remain the same.” (Id. ¶¶ 46–47.)
- December 15, 2015 – Balduin and Reinhard Hesse, on behalf of Frontier, met with Ertefai and Bent in Beverly Hills, California to discuss the proposed transfer. (Id. ¶ 50.) The meeting was arranged at the request and proposal of Ertefai. (Id. ¶ 49.) At the meeting, Ertefai represented the transfer had not yet occurred, and that when it did, it would not be a “true sale.” (Id. ¶ 51.) The Hesses voiced opposition to the transfer but agreed to have their counsel review materials provided by Bent or Ertefai. (Id. ¶ 52.)
- December 17, 2015 – Bent emailed Balduin Hesse summarizing the terms of the proposed transfer. (Id. ¶ 53.) Notably, Bent represented that “while [ASH] will have little in way of assets under [the] proposal, Frontier will still have recourse to [Activ] GmbH and the assets housed in AS (Wright). Our view is that the proposed transfer to GEC leaves Frontier neutral in terms of risk related to the surety bonds and related indemnification.” (Id.) In that same email, Bent represented that ”GEC is also willing to become party to the indemnity agreements if necessary.” (Id. [emphasis supplied]. )
- December 29, 2015 – ASH transferred its entire interest in AS (Wright) (and the three other project entities) to GEC without Frontier‘s knowledge. (Id. ¶ 61.) However, the “Assignment of Equity Interests Agreement” between ASH and GEC states that the purchase and sale agreement was signed November 6, 2015. (Id. ¶ 62.)
- January 19, 2016 – Bent called Balduin Hesse to alert him that the transfer was made at the end of 2015. (Id. ¶ 65.) Bent allegedly stated that the $4.1 million purchase price – a combination of cash payments and debt assumption – paid by GEC for ASH‘s assets was below market value. (Id. ¶¶ 66–67.)
Frontier alleges that the transfer of assets from ASH to GEC was in anticipation of Activ GmbH initiating insolvency proceedings in the European Union. Specifically, in October 2015, an
C. The Instant Dispute
Previously, in June 2014, Frontier sued ASH and AS (Wright) for their alleged failure to make payments under the MIPCA and LLC Agreement. (FAC ¶¶ 26–28; FACC ¶¶ 33–36.) Frontier dismissed that lawsuit in July 2014 when the parties entered into an omnibus agreement and waiver (the “Omnibus Agreement“). (FAC ¶¶ 29–33; FACC ¶¶ 33–36.) The Omnibus Agreement reflects the parties’ desire to cooperate and enter into a joint sale process to sell all membership interests in Wright Solar.6 (See FAC, Exh. 2.) Under the Omnibus Agreement, Frontier remained the manager of the Wright Project and plaintiffs were to pay Frontier a monthly development and management fee until the sale of the Wright Project. (Id. at 4–6.) The parties thereafter extended the joint sale period several times through amendments to the Omnibus Agreement. (FAC ¶ 32; FACC ¶ 39.) The fourth amendment to the Omnibus Agreement revises the services fee plaintiffs must pay defendant during the joint sale period as extended thereby. (See FAC, Exh. 6.)
The instant dispute arose out of the parties’ differing views on the bounds of plaintiffs’ ongoing payment obligations as defined in the fourth amendment, paragraph 2.2(b). Frontier alleges that plaintiffs have defaulted on the Omnibus Agreement by failing to pay monthly development services fees since September 2015. (FACC ¶¶ 39–40.) Frontier sent plaintiffs a notice of default outlining their failure to (i) pay defendant the $39,000 monthly services fee and (ii) reimburse Frontier for expenses it incurred on behalf of Wright Solar. (Id. ¶¶ 41–42.) As of the filing of the
On February 10, 2016, the alleged parent company of plaintiffs, and a non-plaintiff counterclaim defendant in this action, Activ GmbH, initiated insolvency and reorganization proceedings in the European Union. (FACC ¶ 97.) Frontier alleges the insolvency proceedings qualify as an “Insolvency Event” as defined in the LLC Agreement, rendering plaintiffs a “Defaulting Member” under the MIPCA. (Id. ¶¶ 95–99.) Frontier further alleges that the LLC Agreement section 11.3(b) allows it, as the non-defaulting member of Wright Solar, to take possession of AS (Wright)‘s seventy-five (75) percent interest in Wright Solar. (Id.) As a result of these disputes Frontier has effectively shut plaintiffs out of Wright Solar. (See FAC ¶¶ 39–55.) Frontier alleges that plaintiffs, in response to the shut-out, have fraudulently attempted to access Wright Solar‘s QuickBooks account and a router maintained by Frontier. (FACC ¶¶ 100–19.) Plaintiffs vigorously oppose Frontier‘s position that they have defaulted under the agreements. (See FAC ¶¶ 34, 65–72.)
Plaintiffs filed the original complaint seeking declaratory and injunctive relief against Frontier for its alleged ongoing breaches of obligations to plaintiffs beginning in November 2015. (Dkt. No. 1, ¶¶ 46-47.) In response, Frontier brought counterclaims against counterclaim defendants for the alleged fraudulent transfer of assets among their related entities and for fraud and civil theft in connection therewith. (Dkt. No. 25.) Plaintiffs quickly moved for a preliminary injunction requiring specific performance by Frontier of its obligations under the various contracts. (Dkt. No. 21.) The Court denied plaintiffs’ motion for failure to establish they were entitled to specific performance and failure to establish irreparable harm absent injunctive relief, but did order certain monthly disclosures by Frontier to plaintiffs during the pendency of the litigation. (Dkt. No. 66.) Following the Court‘s denial of plaintiffs’ motion for preliminary injunction, plaintiffs amended their complaint to bring damages claims against Frontier and newly named individual defendants for conversion and civil theft based on defendants’ position that Frontier owns 100% of Wright Solar. (See FAC, Counts Three and Four.) Frontier‘s amended counterclaims followed. (See generally FACC.)
II. APPLICABLE STANDARDS OF REVIEW
”
Additionally,
A motion to dismiss pursuant to
A motion under
Pursuant to
III. DEFENDANTS’ MOTION TO DISMISS THE FAC
The Court first addresses defendants’ single motion under
A. Conversion (Count Three)
Plaintiffs’ claim for conversion centers on Frontier‘s position that AS (Wright) forfeited its 75% percent interest when Activ GmbH initiated insolvency proceedings. (FAC ¶¶ 89–93.) Plaintiffs allege that Frontier has wrongfully converted AS (Wright)‘s interest in the Wright Project by “assuming control over Wright Solar and actually excluding AS (Wright) without a judicial determination that Frontier was entitled to more than its contractual minority share in Wright Solar . . . .” (Id. ¶ 93.) Specifically, Frontier has assumed control over Wright Solar by “disregarding AS (Wright)‘s ability to share in Wright Solar‘s assets and profits.” (Id. ¶ 91.)
Defendants argue four grounds for dismissal, namely: (1) whether plaintiffs GEC and ASH can even assert such a claim; and the failure to plead that (2) the individual defendants converted property of plaintiffs; (3) defendants divested AS (Wright) of an ownership interest that is subject to a conversion claim (element one); and (4) damages (element three). The Court addresses each:
1. Proper Plaintiff to Bring Conversion Claim
As a threshold issue, defendants argue the conversion claim fails as to plaintiffs GEC and ASH because neither entity owns the allegedly converted interest in Wright Solar. The Court agrees. The FAC alleges that AS (Wright) holds the 75% interest in Wright Solar and thus cannot allege that defendants converted any property interest of GEC or ASH. At oral argument, plaintiffs conceded that neither GEC nor ASH can assert this claim. Defendants’ motion on this ground is GRANTED.
2. Allegations against Individual Defendants
With respect to whether the FAC pleads sufficient allegations against the individual defendants, AS (Wright) argues that the allegations against the individual defendants, taken as true, establish that the individual defendants are linked to Frontier‘s conversion of AS (Wright)‘s assets because the individual defendants: (a) directly control and participate in all actions taken by Frontier by virtue of their respective positions within Frontier; (b) had advance knowledge of Frontier‘s obligations under the various agreements; (c) made statements to this Court regarding their claim to
3. Allegations of Control of Property Interest (Element One)
Defendants next argue insufficient allegations as to element one, i.e. that Frontier asserted dominion or control over AS (Wright)‘s property in a manner inconsistent with its rights thereto. Here, the FAC alleges that Frontier converted AS (Wright)‘s 75% majority interest in Wright Solar by: claiming Frontier wholly owns Wright Solar when AS (Wright) still had the right to possess its interest; disregarding AS (Wright)‘s right to share in Wright Solar‘s assets and profits; excluding AS (Wright) from access to Wright Solar‘s books and records; and excluding AS (Wright) from all decisions related to Wright Solar. (FAC ¶¶ 89–93.) This sates a proper claim. Under California law, one partner can be liable to his co-partner for conversion of jointly owned business property, including intangible property such as corporate shares. See Oakdale Vill. Group v. Daniel Fong, 43 Cal.App.4th 539, 546 (1996) (a partner can be liable for the conversion of a portion of partnership shares which does not belong to them); Am. Mortg. Corp. v. Fed. Home Loan Mortg. Corp., 75 F.3d 1401, 1411 (9th Cir. 1996) (collecting California cases for the proposition that “a claim of version will lie even if the alleged converted property is intangible“).
Frontier‘s argument that AS (Wright) must allege that Frontier prevented or refused to allow the transfer of jointly owned assets is misplaced. Frontier cites cases allowing conversion claims in those circumstances, but contrary to Frontier‘s assertion, its authority does not limit conversion of business interests to such claims. See Mears v. Crocker First Nat‘l Bank of San Francisco, 84 Cal.App.2d 637, 644–45 (1948) (a claim for conversion is pled “when, according to the complaint defendant transfer agent become a party to an agreement which very effectively limited plaintiff‘s right to dispose of his stock when, where and how he chose, and then refused to convert his stock [as] required under the agreement“); Ralston v. Bank of Cal., 112 Cal. 208, 213 (1896) (claim for conversion lies where defendant bank refused to allow a transfer of plaintiff‘s shares upon defendant‘s books). Indeed, an allegation that a member of a partnership or joint venture has been deprived of a share of the business‘s assets and profits can form the basis of a conversion claim. Second Measure, Inc. v. Kim, 143 F. Supp. 3d 961, 980–81 (N.D. Cal. 2015) (“business assets and profits [are] the proper subject of a claim of conversion“). Moreover, it is well-established that “[o]ne of the incidents of ownership is the free and unhampered right to dispose of property without limitations imposed by strangers to title.” Mears, 84 Cal.App.2d at 644. Frontier‘s lock-out of AS (Wright) from Wright Solar, as well as Frontier‘s position that AS (Wright) no longer has any ownership interest Wright Solar, at a minimum has hindered AS (Wright)‘s ability to market and sell its interest.
AS (Wright) therefore alleges that Frontier has misappropriated property which is subject to a conversion claim under California law. Defendants’ motion on this ground is DENIED.
4. Allegations of Damages (Element Three)
Lastly, Frontier argues that the conversion claim must be dismissed because it pleads only future speculative harm as a result of Frontier‘s alleged conversion. Frontier‘s argument fails to persuade. AS (Wright) may recover “[t]he value of the property at the time of the conversion” with interest, or, alternatively, “an amount sufficient to indemnify the party injured for the loss which is
Frontier relies on Baldwin v. Marina City Properties, Inc., 79 Cal.App.3d 393, 411–12 (1978), for the proposition that speculative harm “is not injurious.” (Dkt. No. 85 at 13:27–28.) Baldwin, however, was decided on the narrow grounds that a plaintiff‘s total failure to allege damages is fatal to a conversion claim. Id. at 412 (sustaining demurrer where plaintiffs sought “compensatory damages in an unspecified sum without stating either of the alternative measures of damage required by section 3336 of the Civil Code“). By contrast, AS (Wright) specifies its damages as “including but not limited to the value of AS (Wright)‘s membership interests, investments in Wright Solar and all assets and profits it is entitled to as majority member of Wright Solar.” (FAC ¶ 94.) While AS (Wright) does not state a specific dollar sum, its alleged 75% interest in Wright Solar can be calculated in terms of monetary value. (See Dkt. No. 66 at 6:14–7:28) (adopting Frontier‘s view that plaintiffs’ losses are “compensable at law, i.e. with money damages.“) These allegations are sufficient under
In conclusion, defendants’ motion to dismiss the conversion claim (Count Three) is GRANTED IN PART. The claim is DISMISSED WITH PREJUDICE with respect to plaintiffs GEC and ASH‘s assertion of a conversion claim. The claim is further DISMISSED insofar as a claim is not plausibly alleged against the individual defendants; the Court dismisses the individual defendants from the conversion claim WITHOUT PREJUDICE to plaintiffs later moving for leave to amend.8 Defendants’ motion to dismiss the conversion claim against Frontier is otherwise DENIED.
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A claim for civil theft in California ultimately rests on whether a plaintiff establishes that a defendant committed theft as defined by
To establish theft under
Absent adequate allegations of the requisite specific intent, the FAC does not state a plausible claim for civil theft. Defendants’ motion to dismiss plaintiffs’ claim for civil theft (Count Four) is
IV. NON-PLAINTIFF COUNTERCLAIM DEFENDANTS’ MOTIONS TO DISMISS THE FACC
Non-plaintiff counterclaim defendants12 move to dismiss Frontier‘s counterclaims against them for lack of personal jurisdiction under
A. Specific jurisdiction: Contacts with California
Frontier first asserts the non-plaintiff counterclaim defendants are subject to the specific jurisdiction of the Court because they committed fraudulent acts in and directed their fraudulent acts toward California. California law14 allows for the exercise of “jurisdiction on any basis not inconsistent with the Constitution of [California] or of the United States.”
Frontier does not argue general jurisdiction but rather relies exclusively on specific jurisdiction. Specific jurisdiction “depends on an affiliatio[n] between the forum and the underlying controversy, principally, activity or an occurrence that takes place in the forum State and is therefore subject to the State‘s regulation.” Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011) (internal quotations omitted). Said otherwise, personal jurisdiction requires that the Court evaluate whether the specific activity giving rise to the causes of action is sufficiently related to the forum state. See Perkins v. Benguet Consol. Mining Co., 342 U.S. 437, 446 (1952); Hanson v. Denckla, 357 U.S. 235, 250-53 (1958). The Ninth Circuit applies a three-prong test to determine whether a non-resident‘s activities are sufficiently related to the forum state to establish specific personal jurisdiction:
- The non-resident defendant must purposefully direct his activities or consummate some transaction with the forum or resident thereof; or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws;
- the claim must be one which arises out of or relates to the defendant‘s forum-related activities; and
- the exercise of jurisdiction must comport with fair play and substantial justice, i.e. it must be reasonable.
Schwarzenegger, 374 F.3d at 802 (citing Lake v. Lake, 817 F.2d 1416, 1421 (9th Cir. 1987)). The counterclaim plaintiff (i.e., Frontier) bears the burden of demonstrating the first two prongs. Id.; Boschetto v. Hansing, 539 F.3d 1011, 1016 (9th Cir. 2008). If Frontier fails to satisfy either of these prongs, then personal jurisdiction is not established in the forum state. Pebble Beach Co. v. Caddy, 453 F.3d 1151, 1555 (9th Cir. 2006). If Frontier carries this burden, then “the [counterclaim] defendant[s] must come forward with a ‘compelling case’ that the exercise of jurisdiction would not be reasonable.” Boschetto, 539 F.3d at 1016 (citing Schwarzenegger, 374 F.3d at 802).
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The Court now addresses the jurisdictional showing as to each non-plaintiff counterclaim defendant. As discussed below, Frontier fails to produce evidence of sufficient contacts under prong one. The Court thus declines to address whether the claims arise out of the forum-related contacts (prong two) or whether the exercise of jurisdiction would be reasonable (prong three).
1. Counterclaim Defendant Activ GmbH
With respect to Activ GmbH, the allegations as to specific jurisdiction fall in two categories: (i) fraudulent conduct directed at Frontier in California by and through its CEO Kevah Ertefai and employee Colin Bent, and (ii) the May 2013 indemnity agreement. (FACC ¶¶ 50–52.) As to the first, Ertefai and Bent traveled to California in December 2015 to discuss with representatives of Frontier the proposed asset transfer of AS (Wright) from ASH to GEC. (Id.) Activ GmbH responds that (as Frontier emphasizes) Ertefai was also president of ASH and an officer of Activ UK and GEC when he traveled to California to meet with Frontier. The Court reads the allegations to be that Ertefai was traveling in his capacity as a representative of ASH and GEC, the parties actually involved in the asset transfer, and not on behalf of ASH‘s parent Activ GmbH. (See FACC ¶¶ 49–51.) This comports with the “well established principle [of corporate law] that directors and officers holding positions with a parent and its subsidiary can and do ‘change hats’ to represent the two corporations separately, despite their common ownership.” United States v. Bestfoods, 524 U.S. 51, 69 (1998) (alteration in original). Absent alter ego, “courts generally presume that directors are wearing their ‘subsidiary hats’ and not their ‘parent hats’ when acting for the subsidiary . . . .” Id. at 69–70 (internal quotations omitted). Based on the allegations, Frontier has not shown that Ertefai was wearing his “parent hat” at the meeting in California. At best the FACC alleges one trip to California by a corporate officer. Yet Frontier provides no authority that this single contact by a corporate officer is sufficient to establish
Next, Frontier relies on the May 2013 indemnity agreement by which Activ GmbH indemnified Frontier on a multi-million dollar bond. It is true that “[a] single forum state contact can support jurisdiction,” but that is only appropriate where “the cause of action . . . arise[s] out of that particular purposeful contact of the [counterclaim] defendant with the forum state.” Yahoo! Inc. v. La Ligue Contre Le Racisme Et L‘Antisemitisme, 433 F.3d 1199, 1210 (9th Cir. 2006) (certain alterations in original) (quoting Lake, 817 F.2d at 1421). Frontier stresses that Activ GmbH‘s signature on the indemnity agreement was critical to Frontier. The indemnity gave assurances to Frontier – an entity much smaller than Activ GmbH – that it would not be left on the hook for the multi-million dollar bond should the Wright Project not live up to expectations. However, Frontier has not sued on the indemnity agreement and does not bring claims that “arise out of” the indemnity agreement. Id. Frontier is simply concerned that Activ GmbH may default but makes no claim arising out of the indemnity agreement itself. In that regard, the indemnity agreement is not “directly related” to this litigation such that specific jurisdiction over Activ GmbH would be appropriate. Id.
In sum, Frontier has not established that the Court has specific jurisdiction over Activ GmbH. Frontier‘s arguments largely go to alter ego, discussed more fully in Section IV.B, below.
2. The UK Counterclaim Defendants
The contacts with respect to Activ UK and Green Evolution (collectively, the “UK counterclaim defendants“) are even more attenuated than those allegedly tying Activ GmbH to California. Activ UK‘s alleged contacts are limited to its officer Kevah Ertefai engaging in fraudulent conduct directed at Frontier in California when he traveled to meet with Frontier‘s officers. (FACC ¶¶ 50–52.) Again, at most, these allegations establish that a representative of Activ UK traveled to California on one occasion. And, Frontier fails to allege that Ertefai traveled to California on behalf of Activ UK itself – rather than on behalf of one of Activ UK‘s alleged alter ego entities.
The alleged jurisdictional contact by Green Evolution is limited to Frontier‘s allegation that Green Evolution perpetuated the alleged fraudulent transfer of AS (Wright) from ASH to GEC by and through its partner Kim Koehler who signed the document effectuating the transfer. (Id. ¶ 91.) That a representative of Green Evolution signed a single document related to Wright Solar is not adequate.
Frontier has not satisfied its obligation to make a prima facie showing that the UK counterclaim defendants “purposefully direct[ed their] activities” to California. Schwarzenegger, 374 F.3d at 802.
3. The Individual Counterclaim Defendants
The contacts Frontier attributes to the individual counterclaim defendants are substantially similar to those already addressed with respect to Activ GmbH and the UK counterclaim defendants, supra. As to Kim Koehler, Frontier asserts he: “on behalf of Green Evolution Capital, cooperated with and perpetuated this fraudulent transfer, as evidenced by his signature on the December 29, 2015, Assignment of Equity Interests, assigning AS (Wright) to GEC,” and showed his “willingness to hold Activ Solar GmbH’s partnership interest in Green Evolution Capital, LLP in trust.” (Dkt. No. 101 at 16:11–14.) Next, Frontier asserts that Colin Bent traveled to California on one occasion, and exchanged emails and phone calls with Frontier’s representatives in California. As to Kaveh Ertefai, Frontier again relies on his visit to California in December 2015.
Frontier’s allegations do not establish that the individual counterclaim defendants personally directed their actions to California.15 Accordingly, the allegations do not rise to a level where due process would permit it to exercise personal jurisdiction over the individual counterclaim defendants. Schwarzenegger, 374 F.3d at 803.
B. Alter Ego: Imputing Jurisdiction over Non-Plaintiff Counterclaim Defendants
Frontier’s principal jurisdictional argument is that the Court’s jurisdiction over plaintiffs may be imputed to the non-plaintiff counterclaim defendants through an alter ego theory.16 Federal courts
To invoke the alter ego doctrine, Frontier must show as to each non-plaintiff counterclaim defendant: “(1) that there [is] such unity of interest and ownership that separate personalities of the corporation and [its shareholder] no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” Mesler, 39 Cal.3d at 300; see also Hickey, 322 F.3d at 1128 (quoting Firstmark Capital Corp. v. Hempel Fin. Corp., 859 F.2d 92, 94 (9th Cir. 1988)). This two-part test involves consideration of a host of factors:
[1] commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses; [2] the treatment by an individual of the assets of the corporation as his own; [3] the failure to obtain authority to issue stock or to subscribe to or issue the same; [4] the holding out by an individual that he is personally liable for the debts of the corporation; [5] the failure to maintain minutes or adequate corporate records, and the confusion of the records of the separate entities; [6] the identical equitable ownership in the two entities; [7] the identification of the equitable owners thereof with the domination and control of the two entities; [8] identification of the directors and officers of the two entities in the responsible supervision and management; [8] sole ownership of all of the stock in a corporation by one individual or the members of a family; [9] the use of the same office or business location; the employment of the same employees and/or attorney; [10] the failure to adequately capitalize a corporation; [11] the total absence of corporate assets, and undercapitalization; [12] the use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation; [13] the concealment and misrepresentation of the identity of the responsible
ownership, management and financial interest, or concealment of personal business activities; [14] the disregard of legal formalities and the failure to maintain arm‘s length relationships among related entities; [15] the use of the corporate entity to procure labor, services or merchandise for another person or entity; [16] the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another; [17] the contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions; [18] and the formation and use of a corporation to transfer to it the existing liability of another person or entity.
Greenspan v. LADT, LLC, 191 Cal.App.4th 486, 513 (2011) (internal alterations omitted) (quoting Zoran Corp. v. Chen, 185 Cal.App.4th 799, 811–12 (2010)).
California courts caution that this list is not exhaustive and no single factor is determinative. The alter ego test should not be construed as a litmus test and “the conditions under which a corporate entity may be disregarded vary according to the circumstances in each case.” Automotriz Del Golfo De Sal S.A. de C.V. v. Resnick, 47 Cal.2d 792, 796 (1957); see also Sonora Diamond Corp. v. Superior Court, 83 Cal.App.4th 523, 539 (2000) (“courts must look at all the circumstances to determine whether the doctrine should be applied“).
The Court addresses the parties’ alter ego arguments with respect to the non-plaintiff counterclaim defendants in turn: (1) Activ GmbH; (2) the UK counterclaim defendants; and (3) the individual counterclaim defendants.
1. Counterclaim Defendant Activ GmbH
The first prong of the alter ego test requires “a showing that the parent controls the subsidiary to such a degree as to render the latter the mere instrumentality of the former.” Gerritsen v. Warner Bros. Entertainment, Inc., 116 F. Supp. 3d 1104, 1138 (C.D. Cal. 2015) (quoting NetApp, Inc. v. Nimble Storage, Inc., 2015 WL 400251, *5 (N.D. Cal. Jan. 29, 2105)). Direct evidence of manipulative control by the parent of its subsidiaries supports a finding of an alter ego relationship. See Institute of Veterinary Pathology, Inc. v. Cal. Health Laboratories, Inc., 116 Cal.App.3d 111, 120 (1981). The parties agree that Activ GmbH is the 100% owner of plaintiff ASH. It is similarly undisputed that Activ GmbH and ASH share several employees, officers, directors, and agents. But it
Beyond overlapping ownership and management, Frontier asserts that the transfer of AS (Wright) from ASH to GEC in December 2015 shows the requisite level of control. Specifically, Frontier asserts that the transfer shows that Activ GmbH “manipulated assets and liabilities between the various entities so as to concentrate the assets in some, and the liabilities in others.” (Dkt. No. 99 at 11:12–13.) The transfer occurred within weeks of Activ GmbH filing for bankruptcy, which in Frontier’s view, shows that Activ GmbH “deliberately undercapitalized itself and its subsidiaries, including ASH . . . .” (Id. at 11:9–11.) Importantly, the FACC does not allege any facts tending to show that that Activ GmbH was involved in the transfer other than the multiple hats of Ertefai. Based on his multiple roles, the FACC includes only a conclusory allegation that all Activ GmbH subsidiaries acted at the direction of Activ GmbH. (FACC ¶¶ 92, 93.) Without any specific facts to support its theory that Activ GmbH was involved, Frontier has not shown the requisite level of control of ASH by Activ GmbH necessary for alter ego.17
Frontier also relies on the May 2013 indemnity agreement with respect to its claim of alter ego. The Court cannot discern how the indemnity agreement is jurisdictionally relevant. The indemnity agreement shows, at most, that Activ GmbH signed as the parent of ASH and AS (Wright). This reflects nothing more than a normal business transaction where a bond holder requires a better capitalized parent company to sign on to protect all parties’ interests. Put simply, the indemnity agreement does not show that Activ GmbH controlled plaintiffs “to such a degree as to render the latter the mere instrumentality of the former.” Gerritsen, 116 F. Supp. 3d at 1138.
Moreover, the Court doubts that treating Activ GmbH as a separate corporate entity may result in injustice (prong two). As discussed with respect to prong one, supra, Frontier takes the position that Activ GmbH undercapitalized itself and ASH when it transferred assets from ASH to
2. The UK Counterclaim Defendants
Next, Frontier argues that the Court’s personal jurisdiction over plaintiffs may be imputed to plaintiffs’ alleged alter egos Activ UK and Green Evolution. As to unity of interest (prong one), Frontier points to the following allegations to support its argument that the Court should disregard corporate formalities and impute plaintiffs’ contacts to the UK counterclaim defendants, namely because they: (i) are the parent companies of plaintiff GEC; (ii) share employees and attorneys with other Activ entities; (iii) deliberately undercapitalized Activ GmbH and ASH by effectuating the transfer from ASH to GEC; (iv) did not maintain an arms-length relationship in connection with the same transfer of assets; and (iv) manipulated assets and liabilities among the various Activ entities.
All of these allegations treat Activ UK and Green Evolution as one. In that regard, they do not show that either entity itself had such pervasive control over plaintiffs that plaintiffs are mere instrumentalities of Activ UK or Green Evolution. Gerritsen, 116 F. Supp. 3d at 1138. The only allegation specific to Activ UK is that Kaveh Ertefai was both the president of ASH and officer of Activ UK. Under California law, “[i]t is considered a normal attribute of ownership that officers and directors of the parent serve as officers and directors of the subsidiary.” Sonora, 83 Cal.App.4th at 548–49. As to Green Evolution, the only specific allegation is that its partner Kim Koehler signed the document effectuating the transfer of AS (Wright) from ASH to GEC. A signature on one document
Accepted as true, the alter ego allegations against the UK counterclaim defendants are legally insufficient to satisfy the unity of interest prong. Having determined that Frontier failed to establish the first prong, the Court declines to address the second prong of the alter ego test at this juncture.
3. The Individual Counterclaim Defendants
Frontier essentially argues that the first prong, i.e. unity of interest and ownership, is met because the individual counterclaim defendants disregarded plaintiffs’ corporate forms in their respective roles as officers and directors of plaintiffs. Said otherwise, Frontier focuses on the roles the individual counterclaim defendants played within the corporate family, ignoring whether they personally have an ownership interest in plaintiffs. While a court should generally look to all circumstances when conducting an alter ego analysis, “ownership in a corporation is a necessary element for the application of the alter ego doctrine under California law.” Hickey, 322 F.3d at 1129–30 (“an individual must own at least a portion of a corporation before an alter ego relationship is deemed to exist under California law“). Frontier’s attempt to invoke the alter ego doctrine as to the individual counterclaim defendants fails on this threshold issue. See id.
As to Colin Bent, Frontier does not allege that he owns any interest in plaintiffs. On that basis alone the alter ego doctrine cannot be invoked against him.
As to Kim Koehler, Frontier alleges merely that he holds a 70.1% interest in Green Evolution “in trust, on behalf of the Activ Solar entities.” (FACC ¶ 51.) First, an allegation that Koehler holds an interest in trust on behalf of separate entities does not amount to a personal interest in Green Evolution for alter ego purposes. Second, Green Evolution is not a plaintiff. Frontier in effect tries to establish alter ego by twice piercing the corporate veil to bootstrap Koehler to plaintiff GEC through Green Evolution’s 100% ownership in GEC. As discussed above, however, there are insufficient allegations to show that Green Evolution and GEC are alter egos of one another. Frontier’s pass-through alter ego theory therefore fails as to Koehler.
Finally, Kaveh Ertefai is the president of ASH, an officer of AS (Wright), and an officer of GEC. As with Bent and Koehler, the Court cannot invoke the alter ego doctrine absent a showing
Frontier’s claim that the alter ego doctrine requires that plaintiffs’ contacts with the forum be imputed to the individual counterclaim defendants fails.
In sum, the motions to dismiss for lack of personal jurisdiction by non-plaintiff counterclaim defendants Activ GmbH, Activ UK, Green Evolution, Colin Bent, Kim Koehler, and Kaveh Ertefai are GRANTED. In light of Frontier’s representation at oral argument that it has uncovered additional facts to support its alter ego theory, the non-plaintiff counterclaim defendants are DISMISSED WITH LEAVE TO AMEND. Any further amended counterclaims must address personal jurisdiction allegations as to each non-plaintiff counterclaim defendant separately and with specificity to make the requisite showing: (i) of each’s own contacts with the State, and/or (ii) that each should be treated as an alter ego of a particular plaintiff. Generic corporate overlap and reliance on a single transaction not “directly related” to Frontier’s counterclaims are insufficient.
V. PLAINTIFFS’ MOTION TO DISMISS THE FACC
Plaintiffs move to dismiss Frontier’s counterclaims against them in part under
A. Plaintiffs’ Motion to Dismiss under Rule 12(b)(1)
Plaintiffs move under
In support of their argument, plaintiffs rely exclusively on the declaration of Dr. Ute Toifl, the court-appointed administrator presiding over the Activ GmbH bankruptcy. (Dkt. No. 87-1, “Toifl Decl.“)18 Mr. Toifl declares that “Austrian law provides that the bankruptcy court has exclusive authority to rule upon disputed claims.” (Id. ¶ 9, Exh. B.) Plaintiffs provide no legal authority for the proposition that an Austrian bankruptcy proceeding divests a United States Court of jurisdiction over Frontier’s claims. Indeed,
B. Plaintiffs’ Motion to Dismiss under Rule 12(b)(6)
Plaintiffs move to dismiss for failure to state a claim under
1. Violation of UFTA (Count Two)
Frontier brings a claim under the UFTA against ASH19 for its role as the transferor in the ASW asset transfer. The purpose of the UFTA is “to prevent debtors from placing property which legitimately should be available for the satisfaction of demands of creditors beyond their reach.”
The UFTA provides a non-exclusive list of factors that may constitute evidence from which a court may infer intent of actual fraud. See
(1) whether the transfer or obligation was to an insider; (2) whether the debtor retained possession or control of the property transferred after the transfer; (3) whether the transfer or obligation was disclosed or concealed; (4) whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) whether the transfer was of substantially all the debtor’s assets; … (8) whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; [and] (9) whether the debtor was insolvent or became insolvent shortly after the transfer was made….
Id. Specifically, Frontier alleges that: ASH transferred its assets to an insider, GEC, and that as a result ASH retained control over the assets (i.e., AS (Wright)) at all times (FACC ¶¶ 15, 44–45, 131); ASH concealed the true nature of the ASW asset transfer through its representatives Kaveh Ertefai and Colin Bent in person and via email (id. ¶¶ 50, 53–58, 66); Frontier sued ASH in 2014 for its alleged defaults in connection with their various agreements, and ASH allegedly began defaulting again by September 2015 (id. ¶¶ 33, 39); ASH transferred all of its assets to GEC in the ASW asset transfer (id. ¶ 74); and ASH transferred the assets to GEC for below market value, leaving ASH unable to meet its obligations to Frontier (id. ¶¶ 32–42, 60).
ASH’s arguments all attack the merits of Frontier’s UFTA claim. For example, ASH invites the Court to resolve the parties’ underlying contract disputes and conclude there was no fraud as a matter of law. Such factual analysis is inappropriate on a Rule 12 motion. At this juncture, Frontier’s only burden is to allege a claim that is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007);
Having found the FACC pleads actual fraud with particularity, the Court need not reach the parties’ alternative arguments regarding constructive fraud. Plaintiffs’ motion to dismiss the UFTA claim against ASH is DENIED.
2. Fraud (Count Three)
Frontier alleges two separate theories to support its fraud claim: (a) first, that plaintiffs, by and through Kaveh Ertefai and Colin Bent, made material misrepresentations or omissions to Frontier regarding any effect of the ASW asset transfer on Frontier in light of the pending insolvency of Activ GmbH; and (b) second, that plaintiffs’ attempt to access the QuickBooks account constitutes fraud.20 Plaintiffs move to dismiss, arguing that the FACC fails to state a fraud claim under both theories.
a. Activ GmbH Insolvency and ASW Asset Transfer
To state a claim, Frontier must allege, inter alia, that plaintiffs made a misrepresentation by “false representation, concealment, or nondisclosure” with the intent to defraud Frontier. Lazar v. Superior Ct., 12 Cal.4th 631, 637 (1996). Frontier’s claim is based on an affirmative misrepresentation. More particularly, the FACC alleges that, in December 2015, Colin Bent made a material misrepresentation on behalf of plaintiffs when he emailed Balduin Hesse summarizing the terms of the proposed ASW asset transfer. (FACC ¶ 53.) Notably, Bent represented:
“while [ASH] will have little in way of assets under [the] proposal, Frontier will still have recourse to [Activ] GmbH and the assets
housed in AS (Wright). Our view is that the proposed transfer to GEC leaves Frontier neutral in terms of risk related to the surety bonds and related indemnification.”
(Id. [emphasis supplied].) Unbeknownst to Frontier, it would not have any recourse against Activ GmbH in light of the impending insolvency due to the October 2015 €57 million arbitration award against Activ GmbH in an unrelated dispute. (Id. ¶ 75.) Frontier alleges that, had it known about the impending insolvency, it would immediately asserted its rights under the LLC Agreement to take complete control of AS (Wright) before it was transferred to GEC. (Id. ¶ 145.)
As with the UFTA claim, supra, plaintiffs’ only argument why Frontier’s well-pleaded claim fails is really a merits challenge.21 Plaintiffs’ arguments that Frontier incorrectly interprets the LLC Agreement is a factual dispute not appropriately resolved on a
b. Access to QuickBooks Account
With respect to the QuickBooks account, Frontier’s fraud claim is nonsensical. Plaintiffs are not alleged to have made any misrepresentation to Frontier and Frontier does not allege any reliance thereon. Frontier conceded at oral argument that it would not include this allegation as a basis for fraud in any amended counterclaims. Plaintiffs’ motion to dismiss the fraud claim, to the extent it is based on accessing the QuickBooks account, is GRANTED.
3. Civil Conspiracy (Count Four)
Under California law, “[t]he elements for an action for civil conspiracy are (1) formation and operation of the conspiracy and (2) damage resulting to [counterclaim] plaintiff (3) from an act done in furtherance of the common design.” Thompson v. Cal. Fair Plan Ass’n, 221 Cal.App.3d 760, 767 (1990). The claim is “not a tort but rather a theory of joint liability whereby all who cooperate in
Plaintiffs argue that the FACC fails to allege any particular act or event that raises a plausible inference that plaintiffs and non-plaintiff counterclaim defendants reached an explicit or tacit understanding of the conspiracy (element one). See Alfus v. Pyramid Tech. Corp., 764 F. Supp. 598, 607 (N.D. Cal. 1991) (agreement to form and operate the conspiracy may be tacit or explicit). To survive a motion to dismiss a civil conspiracy claim, “[i]t is not enough to show that defendants might have had a common goal unless there is a factually specific allegation that they directed themselves toward this wrongful goal by virtue of a mutual understanding or agreement.” Id. The FACC includes the particular allegation that plaintiffs and non-plaintiff counterclaim defendants reached an understanding by:
agreeing to transfer ASH’s interest in AS(Wright) while: intentionally failing to disclose to Frontier Activ Solar GmbH’s insolvency; misrepresenting that Frontier would be ‘left neutral’ in terms of risk as a result of the transfer, despite the Indemnification Agreement being effective against only ASH, which is now without assets as a result of this transfer; accessing the Wells Fargo Bank Account, QuickBooks Account, and router, without Frontier’s authorization, in an attempt to secure the fraudulent trasnfer.
(FAC ¶ 151.)
These very specific allegations raise a plausible inference of a conspiratorial agreement among all counterclaim defendants. Id. Plaintiffs’ motion to dismiss the civil conspiracy claim is DENIED.
VI. PLAINTIFFS’ MOTION TO ENFORCE COMPLIANCE WITH COURT ORDER22
Plaintiffs previously moved for a preliminary injunction requiring Frontier to comply with the parties’ agreements related to the Wright Project. The Court denied plaintiffs’ motion as plaintiffs failed to establish the necessary three elements that would entitle them to specific performance of the contracts under Delaware law. (Dkt. No. 66, “PI Order.“) Relevant here, the PI Order “directed [Frontier] to provide plaintiffs with monthly updates by 5:00 p.m. PST/PDT on the first day of each
Plaintiffs now object to the nature of the updates, arguing the PI Order requires Frontier to disclose significantly more detail and, as a result, Frontier has not complied with the PI Order. Frontier opposes, taking the position that its monthly disclosures satisfy the Court’s directive in the PI Order. Frontier also argues that equity requires the Court not order any further disclosures because plaintiffs are demanding Frontier perform substantial additional work without providing Frontier the benefit of compensation due under the contracts. The Court agrees with Frontier. The PI Order directed monthly disclosures to allow plaintiffs to remain generally apprised of the status of the Wright Project during the pendency of this litigation. The July and August disclosures achieve this end. Plaintiffs’ motion to enforce compliance with the PI Order is therefore DENIED.
VII. CONCLUSION
For the foregoing reasons, the Court hereby ORDERS as follows:
- Defendants’ motion to dismiss the FAC (Dkt. No. 85) is GRANTED IN PART: the conversion claim is DISMISSED WITH PREJUDICE insofar as it is brought by GEC and ASH, the conversion claim against the individual defendants is DISMISSED WITHOUT PREJUDICE to later motion showing good cause for amendment, and the civil theft claim is DISMISSED WITHOUT PREJUDICE to later motion showing good cause for amendment. Frontier shall file its answer to the FAC within seven (7) days of the date of this Order, or by September 14, 2016.
- Non-plaintiff counterclaim defendant Activ GmbH’s motion to dismiss the FACC (Dkt. No. 87), the non-plaintiff individual counterclaim defendants’ motion to dismiss the FACC (Dkt. No. 90), and the non-plaintiff UK counterclaim defendants’ motion to dismiss the FACC (Dkt. No. 91) are GRANTED WITH LEAVE TO AMEND for lack of personal jurisdiction. The non-plaintiff counterclaim defendants are DISMISSED WITHOUT PREJUDICE. Frontier shall file its second amended counterclaims consistent with this Order within fourteen days, or by September 21, 2016. Non-plaintiff
counterclaim defendants shall file their response thereto within fourteen days after Frontier’s second amended counterclaims are filed. - Plaintiffs’ motion to dismiss the FACC (Dkt. No. 89) is GRANTED IN PART: the UFTA claim is DISMISSED WITH PREJUDICE insofar as it is asserted against AS (Wright) and GEC, and the fraud claim is DISMISSED WITH PREJUDICE insofar as it is based on the QuickBooks theory. Plaintiffs shall file their answer within fourteen days after Frontier’s second amended counterclaims are filed.
- Plaintiffs’ motion to enforce compliance with Court order (Dkt. No. 93) is DENIED.
This Order terminates Docket Numbers 85, 87, 89, 90, 91, and 93.
IT IS SO ORDERED.
Dated: September 7, 2016
YVONNE GONZALEZ ROGERS
UNITED STATES DISTRICT COURT JUDGE