David R Hilty et al v. Lonnie Moore et al
Filing
69
MINUTES (IN CHAMBERS) by Judge Christina A. Snyder: The Court hereby DENIES plaintiff's motion for appointment of a receiver 25 . The Court further DISMISSES this case for lack of subject matter jurisdiction. Court Reporter: Not Present. (gk)
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
JS-6
Case No.
CV 12-2089 CAS (JCGx)
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
Present: The Honorable
Date
August 6, 2012
CHRISTINA A. SNYDER
CATHERINE JEANG
Deputy Clerk
Not Present
Court Reporter / Recorder
N/A
Tape No.
Attorneys Present for Plaintiffs:
Attorneys Present for Defendants:
Not Present
Not Present
Proceedings:
I.
(In Chambers:) PLAINTIFF’S MOTION FOR
APPOINTMENT OF TEMPORARY RECEIVER AND FOR
ISSUANCE OF ORDER TO SHOW CAUSE WHY
PERMANENT RECEIVER SHOULD NOT BE APPOINTED
(filed 6/11/12)
INTRODUCTION
Plaintiff David R. Hilty (“Hilty”), individually and derivatively on behalf of
Geisha House, LLC (“Geisha LA”) and Geisha Santa Ana, LLC (“Geisha Santa Ana”),
filed the instant action on March 12, 2012, against defendants Lonnie Moore (“Moore”);
Michael Robert Carri, a/k/a Michael Robert Malin, a/k/a Mike Boogie, a/k/a Mike Boogie
Malin (“Malin”); 2HYPE Productions, Inc. (“2HYPE”); LTM Consulting, Inc. (“LTM”);
Moore & Malin Enterprises, LLC (“MME”); James McDonald (“McDonald”); Robert
Pau (“Pau”); does 1 through 10, inclusive (collectively referred to as “defendants”),1 and
Geisha LA and Geisha Santa Ana as nominal defendants.
1
Plaintiff avers that 2HYPE, LTM, and MME are sham corporations that exist as
an avenue through which Moore, Malin, and their co-conspirators can commingle assets
and divert monies received as a result of their alleged fraudulent conduct. Id. ¶¶ 19–20,
49–56.
Defendant McDonald is the Controller of the Dolce Group, a conglomerate of
restaurants, clubs, and hospitality consulting services owned and operated by Moore and
Malin. Defendant Pau is the Dolce Group’s Director of Operations. Id. ¶¶ 21–22.
CV 12-2089 (08/12)
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Page 1 of 8
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date
JS-6
Case No.
CV 12-2089 CAS (JCGx)
August 6, 2012
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
The complaint alleges claims by Hilty, individually: (1) against all individual
defendants for securities fraud in violation of § 10(b) of the Securities and Exchange Act
of 1934, 15 U.S.C. § 78j (“the Exchange Act”), and Rule 10b–5 promulgated thereunder,
17 C.F.R. § 240.10b5 (“Rule 10b–5”); (2) against all individual defendants for securities
fraud in violation of the Exchange Act § 20(a), 15 U.S.C. § 78t(a); (3) against Moore and
Malin for common law fraud; (4) against all individual defendants for breach of fiduciary
duty; (5) against all defendants for civil conspiracy; (6) against all defendants for unjust
enrichment; (7) against all defendants for accounting; (8) against all defendants for unfair
competition in violation of California Business & Profession Code § 17200 et seq.; and
(9) against Moore and Malin for the appointment of a receiver.
The complaint further alleges claims by Hilty, derivatively on behalf of Geisha LA
and Geisha Santa Ana: (1) against all individual defendants for breach of fiduciary duty;
(2) against all defendants for civil conspiracy; (3) against all defendants for unjust
enrichment; and (4) against all defendants for unfair competition in violation of
California Business & Profession Code §§ 17200 et seq.2 The claims arise out of
plaintiff’s investments in various entities, including Geisha LA, that are owned and
operated by defendants.
On June 11, 2012, plaintiff filed the instant motion for appointment of a temporary
receiver for nominal defendant Geisha LA, and for issuance of an order to show cause
2
Plaintiff brings these claims in a derivative capacity on behalf of Geisha LA and
Geisha Santa Ana, in the right and for the benefit of those entities and their members.
Compl. ¶ 72. Plaintiff asserts that he has standing to bring these derivative claims
pursuant to California Corporations Code § 17501(a) because he is a member of record of
Geisha LA and Geisha Santa Ana, and was so at all times relevant to this action. Id.
Plaintiff also alleges that he adequately represents the interest of the members of Geisha
LA and Geisha Santa Ana who are similarly situated, and that any requirement that he
make a presuit demand upon the mangers of Geisha LA and Geisha Santa Ana to obtain
the actions he desires is excused as futile. Id. ¶¶ 73–74. Plaintiff further alleges that he
complied with California Corporations Code § 17501(a)(2) by delivering a copy of his
complaint to the managers of Geisha LA and Geisha Santa Ana, including Moore and
Malin.
CV 12-2089 (08/12)
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date
JS-6
Case No.
CV 12-2089 CAS (JCGx)
August 6, 2012
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
why a permanent receiver should not be appointed.3 Dkt. No. 25. On June 18 2012,
defendants Moore, Malin, 2HYPE and LTM, and nominal defendants Geisha LA and
Geisha Santa Ana filed an opposition contemporaneously with evidentiary objections and
a motion to strike portions of, and all exhibits attached to, the declaration of Shereene
Arazm. Dkt. No. 31; Dkt. No. 45. Plaintiff filed a reply on June 25, 2012. Dkt. No. 47.
The Court held a hearing on plaintiff’s motion on July 9, 2012.
At the hearing, the Court ordered the parties to submit supplemental briefing
concerning whether plaintiff’s claim under § 10(b) of the Exchange Act and Rule 10b–5
promulgated thereunder was sufficient to vest the Court with jurisdiction over this case,
and if so, whether the Court should exercise supplemental jurisdiction over plaintiffs’
state law claims. Plaintiff submitted his supplemental filing on July 12, 2012. Dkt. No.
61. Defendants submitted their supplemental filing on July 17, 2012. Dkt. No. 64. After
considering the parties’ arguments, the Court finds and concludes as follows.
II.
BACKGROUND
Plaintiff’s claims arise from the individual defendants’ alleged “long-running,
systematic, and pervasive course of fraud, waste, mismanagement, embezzlement, and
diversion of corporate assets” from Geisha LA and other entities (the “Dolce Group
Entities”) that form the Dolce Group. Compl. ¶ 3. Plaintiff alleges that since founding
the Dolce Group in 2003, Moore and Malin have used the Dolce Group Entities as their
“personal piggybank, siphoning off to themselves millions of dollars in corporate funds,
to the detriment of the entities and their other investors.” Id. ¶ 4.
Plaintiff alleges that in or about 2004, Moore and Malin induced him to invest in
three Dolce Group Entities: Geisha LA, Geisha Santa Ana, and Dolce Group Atlanta,
LLC (“Dolce Atlanta”). Id. ¶ 5. On or about December 14, 2004, plaintiff acquired a
0.5% non-managing membership in Geisha LA for $25,000. Id. ¶ 39. On or about
January 5, 2007, plaintiff acquired a 9.5% non-managing membership in Dolce Atlanta
3
Plaintiff nominates Los Angeles attorney David J. Pasternak to serve as receiver.
Pasternak asserts that he has served as a state court receiver “hundreds of times” and that
he has also served as a bankruptcy court custodian, partition referee, and federal court
receiver on numerous occasions. Declaration of David J. Pasternak ¶ 3.
CV 12-2089 (08/12)
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date
JS-6
Case No.
CV 12-2089 CAS (JCGx)
August 6, 2012
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
for $950,000. Id. ¶ 42. Finally, in or around March 2008, plaintiff acquired a 5% nonmanaging membership interest in Geisha Santa Ana as consideration for his previous and
continuing investment in Dolce Atlanta.4 Id. ¶¶ 45–46.
Plaintiff alleges that Moore and Malin, as “managing members,” control and
dominate the operations, activities, and finances of the Geisha Entities to the exclusion
and detriment of non-managing members and a third managing member, Shereene Arazm
(“Arazm”).5 Id. ¶¶ 33–35.
Plaintiff avers that Moore, Malin, and their co-conspirators, McDonald and Pau,
have employed a continuous and systematic scheme and course of conduct to “loot” the
Dolce Group Entities and “defraud” their investors, as evidenced by the following: (1) an
off-the-books “ledger” that keeps track of monies diverted or misappropriated from
various Dolce Group Entities; (2) a secret PayPal account to collect monies from
restaurant gift cards, discount coupons and other merchandise; (3) multiple “side deals”
with various distributors and vendors to exclusively sell certain products at Dolce Group
Entities in exchange for rebate checks made payable to 2HYPE, LTM, and/or MME; (4)
automated teller machine (“ATM”) fees associated with vendors at various Dolce Group
Entities that were split between Moore, Malin, 2HYPE, LTM, and MME; (5) defendants’
pocketing cash and checks payable to them individually classified as “loans” or
“management fees”; and (6) unauthorized “barter transactions,” including trading
services at the various Dolce Group Entities for personal favors and gifts. Id. ¶¶ 49–56.
4
Geisha LA, Geisha Santa Ana, and Dolce Atlanta are hereafter collectively
referred to as the “Geisha Entities.”
5
Arazm filed a complaint in the Los Angeles Superior Court on August 2, 2011
alleging that defendants engaged in a continuous course of fraud and misconduct. See
Arazm v. Malin, et al., LASC Case No. BC46696. On August 1, 2011, Malin filed a
complaint in the Los Angeles Superior Court against Arazm for civil extortion, violation
of civil rights, intentional infliction of emotional distress, and negligent infliction of
emotional distress. See Malin v. Singer, et al., LASC Case No. BC46654. Both cases are
pending before the Superior Court.
CV 12-2089 (08/12)
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date
JS-6
Case No.
CV 12-2089 CAS (JCGx)
August 6, 2012
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
Plaintiff asserts that Malin, Moore, McDonald, and Pau’s individual and collective
conduct has destroyed the Dolce Group Entities and caused them to incur enormous debt.
Id. ¶ 58. Further, plaintiff avers that as a result of the individual defendants’ conduct,
Geisha LA has been sued for various alleged torts and breaches of contract, including
employment discrimination, sexual harassment, and unpaid bills. Id. ¶ 59. Plaintiff
alleges that in response to these lawsuits and creditor demands, Moore and Malin have
moved their assets to offshore accounts in the Cook Islands. Id. ¶ 60.
On or about August 15, 2011, plaintiff demanded that Moore and Malin provide
him with access to all books and records of the Geisha Entities. Id. ¶ 68. Plaintiff asserts
that after numerous communications regarding his demand, he was denied access to the
records he sought. Id. ¶ 70. This action followed. Id. ¶ 71.
III.
LEGAL STANDARD
A.
Subject Matter Jurisdiction
“Federal courts are courts of limited jurisdiction. They possess only that power
authorized by the Constitution and statute . . . .” Kokkonen v. Guardian Life Ins. Co. of
Am., 511 U.S. 375, 377 (1994) (citations omitted). The burden of proof is on the party
asserting federal jurisdiction. See Sopcak v. N. Mountain Helicopter Serv., 52 F.3d 817,
818 (9th Cir. 1995); Ass’n of Am. Med. Coll. v. United States, 217 F.3d 770, 778-79 (9th
Cir. 2000). If jurisdiction is based on a federal question, the pleader must show that he
has alleged a claim under federal law and that the claim is not frivolous. See 5B Charles
A. Wright & Arthur R. Miller, Federal Practice and Procedure, § 1350, pp. 211, 231 (3d
ed. 2004).
B.
Appointment of a Temporary Receiver
Local Rule 66 states “[u]pon good cause shown by verified pleadings or
declaration, the Court may in its discretion appoint a temporary receiver without notice to
creditors.”6 L.R. 66–1. “Concurrently with appointment of a temporary receiver, the
6
See also Federal Rule of Civil Procedure 66 (providing that “the practice in
administering an estate by a receiver or similar court-appointed officer must accord with
CV 12-2089 (08/12)
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date
JS-6
Case No.
CV 12-2089 CAS (JCGx)
August 6, 2012
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
Court shall issue an order to show cause requiring the parties and the creditors of the
defendant to show cause why a permanent receiver should not be appointed.” L.R. 66–3.
The appointment of “[a] receiver is an extraordinary equitable remedy that is only
justified in extreme situations.” Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999
F.2d 314, 316 (8th Cir. 1993; see also Solis v. Matheson, 563 F.3d 425, 437 (9th Cir.
2009) (“The appointment of a receiver is considered to be an extraordinary remedy that
should be employed with the utmost caution and granted only in cases of clear necessity
to protect plaintiff's interests in the property.”) (citations omitted). “While the
appointment of a receiver is within the equity powers of the federal court, it is an
extraordinary step warranted only by the most compelling circumstances.” Bracco v.
Lackner, 462 F. Supp. 436, 456 (N.D. Cal. 1978).
Although there is no precise formula for determining when a receiver may be
appointed, factors typically warranting appointment are: (1) a valid claim by the party
seeking the appointment; (2) the probability that fraudulent conduct has occurred or will
occur; (3) imminent danger that property will be concealed, lost, or diminished in value;
(4) inadequacy of legal remedies; (5) lack of a less drastic equitable remedy; and (6)
likelihood that appointing the receiver will do more good than harm. Aviation Supply
Corp., 999 F.2d at 316–17.
IV.
DISCUSSION
A.
The Court’s Jurisdiction Over this Action
Having reviewed the parties’ supplemental filings, the Court is not satisfied that
plaintiff has adequately stated a prima facie claim for securities fraud. Accordingly, the
Court does not believe it has jurisdiction over this case.7
the historical practice in federal courts or with a local rule”).
7
At the July 20, 2012 telephonic status conference, the Court indicated that it
tentatively believed it had jurisdiction over this action. Upon further review, the Court
now believes that it lacks jurisdiction.
CV 12-2089 (08/12)
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date
JS-6
Case No.
CV 12-2089 CAS (JCGx)
August 6, 2012
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
“The basic elements of a Rule 10b–5 claim . . . are (1) a material misrepresentation
or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security,
(4) transaction and loss causation, and (5) economic loss.” In re Daou Sys., Inc., 411
F.3d 1006, 1014 (9th Cir. 2005).8 In addition, the applicable statute of limitations
provides that a “private right of action” that “involves a claim of fraud, deceit,
manipulation, or contrivance in contravention of a regulatory requirement concerning the
securities laws . . . may be brought not later than the earlier of—
“(1) 2 years after the discovery of facts constituting the violation; or
“(2) 5 years after such violation.” 28 U.S.C. § 1658(b).
1.
Plaintiff’s Claims for Events Preceding March 13, 2007 Are TimeBarred
Plaintiff filed his complaint in this action on March 12, 2012. Therefore, insofar as
plaintiff asserts claims based on his purchase of securities prior to March 13, 2007, these
claims are time-barred.
Plaintiff asserts that he purchased a membership interest in Geisha LA on or about
December 15, 2004. Compl. ¶¶ 39–40. Plaintiff further asserts that he purchased a
membership interest in Dolce Group Atlanta on or about January 5, 2007. Compl. ¶¶
42–43. Accordingly, claims related to these purchases are barred by the statute of
limitations.
8
The fraud must also involve “the use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any national securities exchange.” 15
U.S.C. §78j; 17 C.F.R. § 240.10b–5. Defendants do not dispute that this element is
satisfied. Answer ¶¶ 32, 77.
CV 12-2089 (08/12)
CIVIL MINUTES - GENERAL
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.
CV 12-2089 CAS (JCGx)
Title
DAVID R. HILTY, ET AL. v. LONNIE MOORE, ET AL.
2.
Date
JS-6
August 6, 2012
The Fraud Plaintiff Alleges Regarding his 2008 Acquisition of a
Membership Interest in Geisha Santa Ana Was Not in Connection
With the Purchase of a Security
Section 3(a)(13) and (14) of the Exchange Act defines “purchase or sale” to
include “any contract” to acquire or dispose of securities. 15 U.S.C. § 78c(13), (14).
There can be no § 10(b) claim where there is no purchase of or contract to purchase
securities. Cf Crosstown Apparel Inc. v. Linden, 807 F.2d 33 (2d. Cir. 1986).
Plaintiff asserts that he acquired a five percent interest in Geisha Santa Ana on or
about January 20, 2009. According to plaintiff, he acquired this interest as “consideration
for his previous, and continuing, investment” in Dolce Group Atlanta. Compl. ¶¶ 45–46.
Because plaintiff did not purchase his ownership stake in Geisha Santa, but rather
received this interest in return for his prior investments in another entity, it appears that
acquisition was not in “connection with” the “purchase or sale” of a security.
V.
CONCLUSION
In accordance with the foregoing, the Court hereby DENIES plaintiff’s motion for
appointment of a receiver. The Court further DISMISSES this case for lack of subject
matter jurisdiction.
IT IS SO ORDERED.
00
Initials of Preparer
CV 12-2089 (08/12)
CIVIL MINUTES - GENERAL
:
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CMJ
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