LIFEVOXEL VIRGINIA SPV, LLC, a Virginia LLC; SCOTT MARSCHALL, an individual; DEBBIE GALLO, an individual; KEVIN SINAGRA, an individual; and SCOTT POOLE, an individual v. LIFEVOXEL.AI, Inc., a Delaware Corporation; KOVEY KOVALAN, an individual; and LINH LE, an individual
Case No.: 22-cv-1917-GPC
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA
May 30, 2023
Hon. Gonzalo P. Curiel
1) GRANTING MOTION TO AMEND AND VACATING HEARING; AND
2) DENYING PENDING MOTION TO DISMISS AS MOOT
[ECF Nos. 9, 16]
Before the Court is Plaintiffs’ Motion for Leave to File an Amended Complaint. ECF No. 16. Defendants filed an Opposition, (ECF No. 30), and Plaintiffs filed a Reply, (ECF No. 37). For the reasons below, the Court GRANTS Plaintiffs’ Motion for Leave to File an Amended Complaint. Plaintiff shall file an amended complaint within five (5) days of the Court‘s Order. Pursuant to Local Rule 7.1(d)(1), the hearing currently set for June 2, 2023 is hereby VACATED.
On December 2, 2022, Plaintiffs LifeVoxel Virginia SPV, LLC; Scott Marschall; Debbie Gallo; Kevin Sinagra; Scott Poole; and Peter Bershatsky filed their initial Complaint against Defendants LifeVoxel.AI, Inc.; Kovey Kovalan; and Linh Le. ECF No. 1 (Compl.). Plaintiffs allege six causes of action: (1) violation of Section 12(a)(1) of the Securities Exchange Act; (2) violation of Section 10 of the Securities Exchange Act; (3) violation of Section 20 of the Securities Exchange Act; (4) violation of the Virginia Securities Act; (5) common law fraud; and (6) civil conspiracy. Id. Plaintiffs’ initial Complaint states that Defendants fraudulently induced Plaintiffs, via misrepresentations and “active concealment of information regarding LifeVoxel‘s financial condition,” to invest Simple Agreements for Future Equity (“SAFE Notes“) in Defendant LifeVoxel. Compl. ¶ 2. Plaintiffs allege this money was used to “finance [Defendants‘] personal lives and push out minority investors.” Compl. ¶ 3.
On March 6, 2023, Defendants filed a Motion to Dismiss. ECF No. 9. The Court set a briefing schedule, and the Motion was fully briefed. See ECF Nos. 11, 14, 15. On April 13, 2023, Plaintiffs filed a Motion for Leave to File an Amended Complaint pursuant to
Under
In assessing the propriety of an amendment, courts consider several factors: (1) undue delay; (2) bad faith or dilatory motive; (3) repeated failure to cure deficiencies by amendments previously permitted;2 (4) prejudice to the opposing party; and (5) futility of amendment. Foman, 371 U.S. at 182; United States v. Corinthian Colleges, 655 F.3d 984, 995 (9th Cir. 2011). These factors do not carry equal weight; the possibility of delay alone, for instance, cannot justify denial of leave to amend. DCD Programs, 833 F.2d at 186. The single most important factor is whether prejudice would result to the non-movant as a consequence of the amendment. Eminence Cap., LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (“As this circuit and others have held, it is the consideration of prejudice to the opposing party that carries the greatest weight.“). The burden of demonstrating prejudice falls on the party opposing leave to amend. DCD Programs, 833 F.2d at 187.
DISCUSSION
A. Undue Delay
First, the Court must determine if Plaintiffs unduly delayed in filing this Motion. To show undue delay, the party opposing amendment “must at least show delay past the point of initiation of discovery.” SAES Getters S.p.A. v. Aeronex, Inc., 219 F. Supp. 2d 1081, 1086 (S.D. Cal. 2002). Generally, a motion to amend filed prior to the initiation of discovery, “where no other proceedings have taken place in the interim,” is not seen as unduly delayed. See id. at 1096 (citing DCD Programs, 833 F.2d at 187 (finding 14-month delay insufficient to deny motion to amend)).
Plaintiffs’ request for leave to amend is complicated by the fact that Plaintiffs filed a substantially similar complaint in this Court on April 22, 2022 (LifeVoxel I). See LifeVoxel Virginia SPV, LLC et al v. LifeVoxel.AI, Inc. et al, Case No. 22-cv-566 (S.D. Cal.). This Court dismissed LifeVoxel I in its entirety on August 23, 2022, after Plaintiffs failed to file an opposition to Defendants’ motion to dismiss. See LifeVoxel Virginia SPV, LLC v. LifeVoxel.AI, Inc. et al, 622 F. Supp. 3d 935 (S.D. Cal. 2022). Plaintiffs state they failed to respond to the motion to dismiss because Plaintiffs’ counsel “was engaged in settlement discussions with Defendants’ counsel,” and they “agreed that Defendants would not pursue the Motion to Dismiss and that Plaintiffs would file an amended complaint instead.” ECF No. 16 at 7; ECF No. 16-1 at 1-5 (“Gordon Decl.“) ¶ 4. Plaintiffs’ counsel states she was under the impression the parties agreed to extend the time to file a first amended complaint but that she “inadvertently forgot to file a motion
Regardless of Plaintiffs’ reasons for not filing a motion to dismiss in LifeVoxel I, the Court does not find undue delay. Plaintiffs filed the initial Complaint in this matter on December 2, 2022. ECF No. 1. Defendants filed a Motion to Dismiss, which was fully briefed as of April 7, 2023. ECF Nos. 9, 14, 15. On April 13, 2023, Plaintiffs filed the instant Motion. ECF No. 16. No intervening proceeding or discovery has occurred since Plaintiffs filed their initial complaint in this action. This Court is not aware of, and neither Party has drawn the Court‘s attention to, a case in which a court found undue delay absent at least the initiation of discovery. Defendants cite a Ninth Circuit case in which they argue the court denied leave to amend after the case had been pending for only six months. ECF No. 30 at 31 (citing McGlinchy v. Shell Chem. Co., 845 F.2d 802, 809 (9th Cir. 1988)). However, in that case, the Ninth Circuit stated that the motion to amend was filed “at least six months after [plaintiffs] had become aware of the new claims” (not six months since the filing of the complaint), and noted that at the time the motion to amend was filed, the case had been pending for nearly two years, discovery had concluded, and the case had been set for trial. McGlinchy, 845 F.2d at 805-06, 809 (emphasis added). This is clearly very different from the circumstances in the present action. Thus, because discovery has not started and no substantial proceedings have occurred, the Court finds there is not undue delay.
B. Bad Faith
Bad faith exists when the proposed amendment “will not save the complaint or the plaintiff merely is seeking to prolong the litigation by adding new but baseless legal theories.” Griggs v. Pace Am. Grp., Inc., 170 F.3d 877, 881 (9th Cir. 1999). Bad faith
Plaintiffs argue the proposed amendments are not an attempt to prolong the litigation because the initial complaint was filed only four months prior to their request to amend. ECF No. 16 at 14. They further argue that, once they “discovered the correct emails and presentation that should have been referenced in the complaint,” they allowed Defendants the opportunity to agree to a stipulation to file an amended complaint. Id. (citing ECF No. 16-2 (Khan Decl.) ¶ 3). Defendants assert that bad faith exists because the proposed amendments do not plead facts “with the requisite particularity” to survive a motion to dismiss. ECF No. 30 at 30.
The Court finds that Plaintiffs have not clearly acted in bad faith. The initial complaint in this action was filed only six months ago, and as stated above, no discovery has occurred, which indicates that Plaintiffs do not appear to be engaged in attempts to prolong the litigation. The record in this action, and in LifeVoxel I, does not show a history of dilatory tactics abusing the rules of procedure. Nevertheless, it is not lost on this Court that Plaintiffs’ counsel appears to have suffered from a number of mistakes and oversights throughout the course of this action and LifeVoxel I. It is not entirely clear to this Court why Plaintiffs’ counsel only discovered the relevant presentations and emails in March 2023. See ECF No. 16 at 8-9. Further, Plaintiffs’ counsel admits she “inadvertently forgot” to file a motion to extend the time to file an amended complaint, or otherwise modify the hearing and briefing schedule in LifeVoxel I. ECF No. 16 at 7. Nevertheless, the Court trusts that Plaintiffs’ counsel will continue in good faith to
C. Prejudice
“Prejudice is the touchstone of the inquiry under Rule 15(a),” and “[a]bsent prejudice, or a strong showing of any of the remaining Foman factors, there exists a presumption under Rule 15(a) in favor of granting a leave to amend.” Eminence Cap., 316 F.3d at 1052 (internal quotations omitted). Prejudice may exist where new allegations “greatly alter[] the nature of the litigation” and would require defendants to undertake, “at a late hour, an entirely new course of defense.” Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990); Peterson v. California, No. 1:10-cv-01132-SMS, 2011 WL 3875622, at *3 (E.D. Cal. Sept. 1, 2011) (“[W]hen, after a period of extensive discovery, a party proposes a late-tendered amendment that would fundamentally change the case to incorporate new causes of action and that would require additional discovery, the amendment may be appropriately denied as prejudicial to the opposing party.“).
The Court finds amendment at this stage and under these circumstances would not unduly prejudice Defendants. Plaintiffs’ proposed amended complaint does not add new legal claims or theories. See ECF No. 16 at 15. The new factual allegations do not alter the nature of the litigation to a significant extent, as Plaintiffs state the amendments simply seek to clarify allegations made in LifeVoxel I. Further, as mentioned elsewhere, the litigation is in its early stages. See Fremantlemedia N. Am., Inc. v. AXA Ins. Co., 2010 WL 11601204, at *3 (C.D. Cal. Nov. 5, 2010) (granting motion for leave to amend because the case was in “its early stages and neither party has conducted discovery, except for initial disclosures“). Defendants have filed a Motion to Dismiss, but expenses incurred before a motion to amend is filed do not alone establish prejudice. United States v. United States Healthcare Ins. Co., 848 F.3d 1161, 1184 (9th Cir. 2016). Accordingly,
D. Futility
An amendment is futile “only if it would clearly be subject to dismissal.” SAES Getters, 219 F. Supp. 2d at 1086 (citing DCD Programs, 833 F.2d at 188). Amendment is futile when a court could not “conceive of additional facts that could, if formally alleged, support the claim[s].” Corinthian Colls., 655 F.3d at 995. “While courts will determine the legal sufficiency of a proposed amendment using the same standard as applied on a
Defendants’ argue Plaintiffs’ Motion should be denied because the proposed amended complaint does not adequately plead any causes of action that might survive a motion to dismiss. ECF No. 30 at 11. This Court previously dismissed Plaintiffs’ action based on the same claims and legal theories, (LifeVoxel, 622 Supp. 3d at 948); however, Defendants’ motion to dismiss in the prior action was unopposed, seemingly due to inadvertence or excusable neglect on behalf of Plaintiffs’ counsel, (ECF No. 16 at 7-8).
The Court does not intend to rehash each legal issue from LifeVoxel I without the benefit of substantive briefing on the issues presented therein. However, the Court notes that Plaintiffs’ LifeVoxel I complaint suffered from three main problems: (1) Plaintiffs
Plaintiffs’ proposed amended complaint provides additional facts intended to address each of these deficiencies. First, the Court previously found that Plaintiffs had failed to allege facts showing the “who, what, when, where, and how” of Defendants’ allegedly fraudulent and misleading presentations. See id. at 945. Plaintiffs’ proposed amended complaint includes additional details as to these statements and attaches the presentations as exhibits. See ECF No. 16-1 at 325-26. Second, the Court found Plaintiffs had not adequately pled facts to show that Defendants acted with the requisite mental state intending to “deceive, manipulate, or defraud.” LifeVoxel, 622 F. Supp. 3d at 945 (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)). Plaintiffs’ proposed amended complaint provides new facts that pertain to Defendants’ mental state at the time they made the alleged misrepresentations and omissions to Plaintiffs. See ECF No. 16-1 at 338 ¶ 126. Last, this Court previously found that Plaintiffs had not sufficiently pled loss causation because they had not pled any facts to show that the value of their SAFE Notes investment had been reduced. LifeVoxel, 622 F. Supp. 3d at 947. Plaintiffs’ proposed amended complaint alleges new facts as to the value of LifeVoxel, namely that it “has been able to secure no other investors and has no present marketable value.” ECF No. 16-1 at 339 ¶ 130. The Court finds this could feasibly impact the Court‘s loss causation analysis.
In making these findings, the Court does not purport to definitively find that Plaintiffs’ proposed amended complaint would survive a motion to dismiss. The Court merely finds that Plaintiffs have included additional factual allegations intended to
Overall, the Foman factors weigh in favor of permitting Plaintiffs to amend their Complaint. The Court GRANTS Plaintiffs’ Motion for Leave to File an Amended Complaint given the strong federal policy favoring amendments due to a preference for resolving cases on the merits. See DCD Programs, Ltd., 833 F.2d at 186.
CONCLUSION
For the reasons set forth above, the Court GRANTS Plaintiffs’ Motion for Leave to File an Amended Complaint. Plaintiff shall file an Amended Complaint within five (5) days of the Court‘s order. The hearing currently set for June 2, 2023 is VACATED. The pending Motions to Dismiss are DENIED as MOOT.
IT IS SO ORDERED.
Dated: May 30, 2023
Hon. Gonzalo P. Curiel
United States District Judge