Swingless Golf Club Corporation v. Taylor et al, No. 3:2008cv05574 - Document 85 (N.D. Cal. 2009)
Court Description: ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS by Judge Alsup granting in part and denying in part 71 Motion to Dismiss (whalc1, COURT STAFF) (Filed on 12/24/2009)
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Swingless Golf Club Corporation v. Taylor et al Doc. 85 1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 11 For the Northern District of California United States District Court 10 SWINGLESS GOLF CLUB CORPORATION, a Wyoming corporation, Plaintiff, 12 15 16 17 18 ROY H. TAYLOR, individually and d/b/a CENTERFIRE GOLF COMPANY, and JAMES S. STOWELL, an individual, JACK GALANTI, an individual, MIKE STRINGER, an individual, CENTERFIRE GOLF COMPANY, a California corporation, NEW RIVER INDUSTRIES CORP., EZEE GOLF LLC, a Delaware limited liability company, and STEVE FLUKE, an individual, Defendants. 19 20 ORDER GRANTING IN PART AND DENYING IN PART COUNTERDEFENDANTS’ MOTION TO DISMISS AMENDED COUNTERCLAIMS v. 13 14 / 22 ROY H. TAYLOR, JAMES S. STOWELL, an individual, JACK GALANTI, an individual, MIKE STRINGER, an individual, STEVE FLUKE, an Individual, 23 Counterclaimants, 21 24 v. 25 SWINGLESS GOLF CORPORATION, A Wyoming Corporation, JAMES DEPORCHE, an individual, and JOYCE TAYLOR, an individual, and DOES 1–25, 26 27 28 No. C 08-05574 WHA Counterdefendants. / Dockets.Justia.com 1 INTRODUCTION 2 In this intellectual property dispute involving a trigger-equipped, gunpowder-loaded golf 3 club that enables a user to launch a golf ball over two hundred yards without swinging, 4 counterdefendant Swingless Golf Club Corporation and third-party defendants James DePorche 5 and Joyce Taylor move to dismiss eight amended counterclaims proffered by counterclaimants 6 Roy H. Taylor, James S. Stowell, Jack Galanti, Mike Stringer, and Steve Fluke. For the reasons 7 stated below, the motion is GRANTED IN PART and DENIED IN PART. 8 STATEMENT 9 1. For the Northern District of California United States District Court 10 THE COMPLAINT Plaintiff Swingless Golf Club Corporation (“SGCC”), a Wyoming corporation, initiated 11 this lawsuit on December 15, 2008, against a number of business entities and individuals, 12 including counterclaimants Taylor, Stowell, Galanti, Stringer, and Fluke (Dkt. No. 1). As alleged 13 in the complaint, SGCC, a Wyoming corporation, is the direct successor-in-interest to Swingless 14 Golf Corporation (“Swingless Golf”), a dissolved California corporation. 15 SGCC is in the business of manufacturing and selling — as its name implies — a product 16 called the swingless golf club, which enables a golfer to drive golf balls great distances without 17 swinging through the use a beveled piston and explosives.1 SGCC is also alleged to own trade 18 secrets, patents, and trademarks involved in the production of this product. Many individual 19 defendants in this action are former Swingless Golf employees who are now allegedly agents, 20 representatives, or employees of a separate company called EZee Golf LLC, which makes its own 21 swingless golf product to compete with SGCC. Defendant Roy H. Taylor is the former chief executive officer of Swingless Golf, and is 22 23 the inventor and former owner of four U.S. patents encompassing the swingless golf club 24 invention: No. 5,522,594, No. 5,816,927, No. 5,924,932, and No. 6,139,440. Additionally, there 25 are processes, methods, and techniques of manufacturing the swingless golf club product 26 27 This product should not be confused with the spring-loaded billiard cue (U.S. Patent No. 3,858,882) or ACME Rocket Sled (see Ian Frazier, Coyote v. Acme, The New Yorker, February 26, 1990, at 42–43). 1 28 2 1 developed by Swingless Golf that are alleged to qualify as trade secrets under California law and 2 are protected by disclosure agreements between defendants and Swingless Golf. 3 In June 2002, defendant Roy Taylor assigned the ’594, ’927, and ’932 patents to 4 Swingless Golf, making the California corporation the exclusive owner of those patents. Five 5 months later, defendant Taylor transferred related non-patent intellectual property rights, 6 including trade secrets, to Swingless Golf. Defendants Steve Fluke and Mike Stringer entered 7 into identical agreements at around the same time period, where they also acknowledged that 8 Swingless Golf owned the intellectual property in question and promised not to sell or use it. 9 Defendant Taylor was subsequently removed from his position as CEO of Swingless Golf in 11 For the Northern District of California United States District Court 10 approximately August 2003. In September 2003, defendant Taylor executed two patent assignment documents — 12 without authorization from Swingless Golf — in which he purported to transfer the ’594 and ’932 13 patents and the trademark “Swingless” to himself, and then to an alleged sham corporation called 14 “New River Industries Corporation.” Swingless Golf promptly brought suit in Alameda County 15 Superior Court alleging that defendant Taylor lacked the authority to effectuate the September 16 2003 transfers. Following that lawsuit, the parties entered into a settlement agreement in which 17 defendant Taylor agreed to execute assignments to return the ’927 and ’932 patents and the 18 trademark “Swingless” back to Swingless Golf. In August 2005, the Alameda County Superior 19 Court ordered the patents reassigned pursuant to the settlement agreement. This judgment was 20 recorded with the USPTO in April 2006. 21 Swingless Golf dissolved in 2006 and all its interests — including ownership of the 22 intellectual property underlying the swingless golf club product — were assigned to SGCC, a new 23 Wyoming corporation. In March 2007, without approval from SGCC, defendants again 24 unilaterally purported to transfer the ’927 and ’932 patents to themselves. As before, SGCC is 25 attempting to void these transfers. 26 In the action before the undersigned, plaintiff SGCC alleges that defendants did not have 27 the authority for such a transfer, and that since at least April 2009, defendants have been offering 28 for sale a product through EZee Golf that is allegedly similar to the swingless golf club sold by 3 1 plaintiff. The product sold by defendants is allegedly based on the same functionality, 2 specifications, trade secrets, and patents as those owned by plaintiff. The complaint also alleges 3 that the competing golf club sold by defendants has a sticker on its shaft identifying that it 4 “incorporates the ’440, ’927, and ’932 Patents, which belong to [plaintiff]” (Compl. ¶ 34). 5 Defendants allegedly told undercover buyers and investors that defendants owned the patents in 6 dispute, even though they knew this statement to be false. 7 For the Northern District of California United States District Court 8 A first amended complaint was filed by SGCC on April 7, 2009, alleging the following causes of action (Dkt. No.29): 9 1. Patent infringement; 10 2. Misappropriation of trade secrets; 11 3. Intentional interference with contractual relations; 12 4. Intentional interference with prospective business advantage; 13 5. Unfair competition; 14 6. Lanham Act violation; and 15 7. Breach of contract. 16 An order dated July 7, 2009, dismissed the fourth claim but upheld all remaining claims (Dkt. No. 17 49). On August 24, 2009, plaintiff filed a second amended complaint that omitted both 18 “intentional interference” claims and added the allegation that defendants were on notice of their 19 alleged patent infringing activities since 2002 (Dkt. No. 59). AMENDED COUNTERCLAIMS 20 2. 21 Following the filing of plaintiff’s second amended complaint, defendants Roy H. Taylor, 22 James S. Stowell, Jack Galanti, Mike Stringer, and Steve Fluke filed eight counterclaims against 23 plaintiff SGCC and two third-party individuals: (1) James DePorche, a former Director of 24 Swingless Golf and an alleged Director of SGCC, and (2) Joyce Taylor, the former Secretary of 25 Swingless Golf, an alleged Director of SGCC, and defendant Roy Taylor’s ex-wife (Dkt No. 69 26 (“ACC”) ¶¶ 6, 7, 34). For the sake of convenience, the five individual defendants listed above 27 will be referred to collectively as “counterclaimants,” and SGCC, DePorche, and Joyce Taylor 28 will be referred to collectively as “counterdefendants.” 4 For the Northern District of California United States District Court 1 In their amended counterclaims, counterclaimants allege that they were fraudulently 2 induced by counterdefendants to transfer their intellectual property rights, including patent rights 3 and trade secrets, to Swingless Golf and were “systematically removed as business partners, 4 members or employees by the Board of Directors of Swingless Golf Corp,” which included 5 Swingless Golf director James DePorche and director/secretary Joyce Taylor (ACC ¶¶ 26, 28, 6 62–67). Counterclaimants additionally argue that they “relied on the representations presented by 7 [DePorche] and [Joyce Taylor] and agreed that the company Swingless Golf would be run more 8 efficiently with only [DePorche] and [Joyce Taylor] in operation” (id. ¶ 29). These 9 representations were allegedly false because counterdefendants DePorche and Taylor only 10 intended to “take control of the company and dissolve it and establish a new company where they 11 would be the sole [shareholders] and would control the patents and all subsequent designs arising 12 from [counterclaimant Roy] Taylor’s own designs” (id. ¶ 32). As a result, counterclaimants state 13 that they were “systematically relieved of their duties and never issued the stock shares as 14 promised by the Board of Directors of the original company Swingless Golf” (id. ¶ 31). 15 Counterclaimants also assert that they have developed and are marketing a design under a 16 new patent — entirely apart from the patents that were allegedly assigned to Swingless Golf — 17 that is currently pending approval as U.S. Patent Application No. 123107 (id. ¶¶ 46, 49). 18 Referring to this new patent-pending design, counterclaimants allege that counterdefendants 19 DePorche and Taylor “have now taken the new golf club design from [counterclaimants] and are 20 marketing it as their own[, t]hus infringing on a patent pending design of [counterclaimants]” 21 (id. ¶ 61). 22 Finally, counterclaimants allege that on August 31, 2006, counterdefendants 23 reincorporated Swingless Golf, a California corporation, into SGCC, a Wyoming corporation, and 24 assigned all of Swingless Golf’s intellectual property interests to the new entity before dissolution 25 (id. ¶¶ 50, 51). Although counterclaimants held various amounts of stock in Swingless Golf at the 26 time of the transfer of assets and dissolution, they allegedly received neither notice that the 27 California corporation was dissolving, value for their shares, nor reimbursement for the personal 28 funds that they invested (id. ¶¶ 52, 53). Counterclaimants likewise received no shares in the new 5 1 Wyoming entity (id. ¶ 54). In sum, counterclaimants assert that counterdefendants, with respect 2 to their handling of Swingless Golf’s transformation into SGCC, “failed to hold noticed share 3 holder meetings, issue shares as required, produce any accounting of the business operation, or 4 produce quarterly, or annual reports of the business operations” (id. ¶ 60). 5 6 in personal assets and the undetermined value of their stock in Swingless Golf (id. ¶ 56). This 7 includes an allegation by Roy Taylor that he took out numerous loans in the name of Swingless 8 Golf, using his own personal assets as collateral, but that Swingless Golf refused to acknowledge 9 or repay these loans (id. ¶¶ 37–40). For the Northern District of California 10 United States District Court As a result of these alleged actions, counterclaimants allege damages of at least $315,000 In sum, counterclaimants allege the following counterclaims: 11 1. Fraud against counterdefendants James DePorche and Joyce Taylor; 12 2. Conversion against counterdefendants James DePorche and Joyce Taylor; 3. Unjust enrichment against counterdefendants James DePorche and Joyce Taylor; 4. Breach of implied contract against counterdefendants James DePorche and Joyce Taylor; 5. Corporate waste (misuse of investors’ funds) against counterdefendants James DePorche and Joyce Taylor; 6. Corporate waste (abandonment of patents) against counterdefendants SGCC, James DePorche, and Joyce Taylor; 7. Breach of fiduciary duties against counterdefendant James DePorche; and 8. Corporate abuse against counterdefendants James DePorche and Joyce Taylor. 13 14 15 16 17 18 19 20 21 22 Counterdefendants now move to dismiss all eight counterclaims pursuant to FRCP 23 12(b)(6) (Dkt. No. 71). 24 ANALYSIS 25 A motion to dismiss a counterclaim brought pursuant to Federal Rule of Civil Procedure 26 12(b)(6) is evaluated under the same standard as a motion to dismiss a complaint. Rule 12(b)(6) 27 tests the legal sufficiency of the claims asserted and “must be read in conjunction with Rule 8, 28 which requires a short and plain statement showing that the pleader is entitled to relief and 6 1 contains a powerful presumption against rejecting pleadings for failure to state a claim.” Ileto v. 2 Glock, Inc., 349 F.3d 1191, 1200 (9th Cir. 2003) (quotation marks omitted). These settled 3 principles are qualified by the more stringent pleading standard recently articulated by the 4 Supreme Court in Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949–50 (2009) (establishing a 5 “plausibility” standard for the adequacy of stating a valid claim in a federal complaint under 6 FRCP 8(a)(2)). 7 1. COUNTERCLAIM ONE: FRAUD AGAINST COUNTERDEFENDANTS DEPORCHE AND TAYLOR. 8 “Under California law, a fraud action requires five elements: 1) misrepresentation; 2) 9 knowledge of the falsity of the representation; 3) intent to induce reliance; 4) justifiable reliance; 10 pleading standard of FRCP 9(b) applies to claims of fraud, requiring that “a party must state with For the Northern District of California United States District Court and 5) damages.” Stewart v. Ragland, 934 F.2d 1033, 1043 (9th Cir. 1991). The heightened 11 12 particularity the circumstances constituting fraud,” while “[m]alice, intent, knowledge, and other 13 conditions of a person’s mind may be alleged generally.” Thus, “[a] pleading is sufficient under 14 Rule 9(b) if it identifies the circumstances constituting fraud so that a defendant can prepare an 15 adequate answer from the allegations. While statements of the time, place and nature of the 16 alleged fraudulent activities are sufficient, mere conclusory allegations of fraud are insufficient.” 17 Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989) (citations omitted). 18 Counterclaimants allege that counterdefendants DePorche and Taylor fraudulently 19 induced all five counterclaimants to transfer their intellectual property rights to Swingless Golf by 20 convincing counterclaimants that the transfer would be in the best interests of Swingless Golf as 21 a company (ACC ¶¶ 28, 29, 63–67). But, following the transfer, counterdefendant DePorche 22 “systematically removed all defendants from employment with [Swingless Golf]. . . in August 23 2003, which fraudulently precluded defendants from using the intellectual property that they 24 personally developed” (Id. ¶¶ 31, 67). 25 It is undisputed that counterclaimants have sufficiently alleged a misrepresentation (that 26 counterdefendants informed them that it was in the best interest of the company for only 27 DePorche and Joyce Taylor to be in control, when allegedly it was not), intent to induce reliance 28 (that counterdefendants wanted counterclaimants to relinquish such control), and damages (that 7 1 counterclaimants were hurt financially by their loss of control when Swingless Golf reorganized 2 as SGCC). In their motion, counterdefendants DePorche and Joyce Taylor challenge only the 3 second and fourth prongs of the fraud claim. 4 5 While counterdefendants DePorche and Taylor admit that counterclaimants have sufficiently alleged misrepresentation, they challenge whether the allegations are sufficient to 7 show knowledge by counterdefendants that the statements were false when made. 8 Counterdefendants argue that the statements targeted by this counterclaim “appear to be the valid 9 business judgment of a director of a company. There is no indication . . . as to how these 11 For the Northern District of California Prong Two: Knowledge of the Falsity of the Representation. 6 10 United States District Court A. representations were false” (Br. 5). As explained above, however, Rule 9(b)’s heightened pleading requirements do not apply 12 to allegations regarding an accused’s state of mind — thus, knowledge need only be alleged 13 generally to state a valid claim for fraud. FRCP 9(b); Zucco Partners, LLC v. Digimarc Corp., 14 552 F.3d 981, 990 (9th Cir. 2009). Here, counterclaimants have met this non-heightened pleading 15 standard, which presumably is the Iqbal standard under Rule 8. Specifically, they have alleged 16 that DePorche and Taylor had knowledge that the representations were false due to an evident 17 motive for making such false misrepresentations — e.g., to “keep all income . . . for themselves” 18 (see ACC ¶ 34). 19 Counterdefendants DePorche and Joyce Taylor argue in the alternative that an “opinion is 20 not a misrepresentation” (Reply Br. 1–2). This argument, however, is raised first in their reply 21 brief, and therefore need not be considered. Nevertheless, the Ninth Circuit has clearly held that: 22 Although predictions as to future events cannot normally form the basis of a fraud action, California law carves out an exception to this rule ‘where a party holds himself out to be specially qualified and the other party is so situated that he may reasonably rely upon the former’s superior knowledge.’” 23 24 25 In re Jogert, Inc., 950 F.2d 1498, 1507 (9th Cir.1991) (quoting Borba v. Thomas, 70 Cal. App. 3d 26 144, 152 (1977)). In this case, DePorche and Joyce Taylor were both Directors of Swingless Golf 27 when they allegedly made the misrepresentations to counterclaimants. Therefore, given the 28 8 1 relative positions of all parties, counterclaimants could have reasonably relied upon the superior 2 knowledge of counterdefendants. 3 In sum, counterclaimants have proffered sufficient facts to allege counterdefendants’ 4 knowledge of the falsity of the representations, and this prong is satisfied for purposes of 5 surviving a motion to dismiss. 6 7 8 For the Northern District of California United States District Court 9 B. Prong Four: Justifiable Reliance. As to this prong, counterdefendants simply argue that counterclaimants have failed to state why their reliance on DePorche’s and Joyce Taylor’s representations was justified. This argument is rejected. Counterclaimants do sufficiently state why their reliance on 10 counterdefendants’ misrepresentations was justifiable. Specifically, counterclaimants state that 11 they transferred ownership and signed away their rights to compete because they believed 12 “DePorche to be acting in the best interests of [Swingless Golf],” and they were told that such a 13 transfer was “essential” to the future operation of the company (ACC ¶¶ 28, 29, 63–66). As noted 14 above, given the respective positions of DePorche and Joyce Taylor in the company at the time 15 the misrepresentations were allegedly made, counterclaimants have sufficiently alleged facts to 16 show that such reliance was reasonable, at least for purposes of surviving a motion to dismiss. 17 In sum, counterclaimants have sufficiently alleged their counterclaim of fraud against 18 counterdefendants DePorche and Joyce Taylor, and the motion to dismiss as to this counterclaim 19 is DENIED. 20 2. COUNTERCLAIM TWO: CONVERSION AGAINST COUNTERDEFENDANTS DEPORCHE AND TAYLOR. 21 The elements of a conversion claim under California law are as follows: 22 23 24 25 26 27 28 A conversion occurs where the defendant wrongfully exercises dominion over the property of another. Greka Integrated, Inc. v. Lowrey, 133 Cal. App. 4th 1572, 35 Cal.Rptr. 3d 684, 691 (Ct. App. 2005) (citing Farmers Ins. Exch. v. Zerin, 53 Cal. App. 4th 445, 61 Cal.Rptr.2d 707, 709 (Ct. App. 1997)). To establish conversion, a plaintiff must show (1) his ownership of or right to possess the property at the time of the conversion, (2) that the defendant disposed of the plaintiff’s property rights or converted the property by a wrongful act, and (3) damages. Messerall v. Fulwider, 199 Cal. App. 3d 1324, 245 Cal. Rptr. 548, 550 (Cal. Ct. App. 1988) (citing Baldwin, 145 Cal.Rptr. at 416). A plaintiff in a conversion action must also prove that it did not consent to the defendant's exercise of dominion. 9 For the Northern District of California United States District Court 1 Band of New York v. Fremont General Corp., 523 F.3d 902, 914 (9th Cir. 2008). 2 Counterclaimants allege that counterdefendants DePorche and Taylor converted 3 defendants’ shares of stock in Swingless Golf when counterdefendants dissolved the California 4 business and failed to compensate counterclaimants for the value of this stock (ACC ¶¶ 68–75). 5 In their brief, counterdefendants DePorche and Taylor concede that counterclaimants have 6 sufficiently alleged that stock was converted by someone at Swingless Golf, that counterclaimants 7 did not consent to the conversion, and that counterclaimants were damaged as a result. 8 Counterdefendants challenge only that counterclaimants have not sufficiently alleged that 9 DePorche and Joyce Taylor personally converted the stock. 10 This argument is unpersuasive. The law is clear, as counterdefendants admit, that 11 “[d]irectors or officers of a corporation [can] incur personal liability for torts of the corporation . . 12 . [if] they participate in the wrong or authorize or direct that it be done.” United States Liability 13 Insurance Co. v. Haidinger-Hayes, Inc., 463 P.2d 770, 775 (Cal. 1970) (emphasis added). In this 14 connection, counterclaimants have sufficiently alleged such participation, authorization, or 15 direction by DePorche and Taylor. For example, counterclaimants state that DePorche and 16 Taylor were members of the Swingless Golf Board of Directors, and that the Board assigned 17 counterclaimants’ property and then voted to dissolve Swingless Golf (ACC ¶¶ 9, 51, 70). 18 Counterclaimants further allege that DePorche and Taylor were individually responsible for 19 “systematically remov[ing counterclaimants] as business partners, members, or employees” of 20 Swingless Golf (id. ¶ 26). Finally, it has been sufficiency alleged that “[t]he only shareholders of 21 Wyoming Swingless were [DePorche] and [Joyce Taylor],” which means that the entire benefit of 22 the alleged conversion of Swingless Golf stock allegedly went to counterdefendants DePorche 23 and Taylor (id. ¶ 30). These factual allegations certainly make it plausible, under the Iqbal 24 standard, that DePorche and Joyce Taylor participated in the wrong or authorized or directed that 25 it be done. 26 27 28 In sum, counterclaimants have sufficiently stated a conversion counterclaim, therefore the motion to dismiss this counterclaim is DENIED. 3. COUNTERCLAIM THREE: UNJUST ENRICHMENT AGAINST COUNTERDEFENDANTS DEPORCHE AND TAYLOR. 10 1 To prove an unjust enrichment claim in California, among other things, counterclaimants 2 must show that counterdefendants received a benefit and unjustly retained such a benefit at the 3 expense of another. Lectrodryer v. Seoulbank, 91 Cal. Rptr. 2d 881, 883 (Ct. App. 2000) (cited in 4 In re Joe Atkinson, 14 Fed. Appx. 960, 962 (9th Cir. 2001) (unpublished)). Section 338(d) of the 5 California Code of Civil Procedure states that such a claim must be brought within three years of 6 the date that the aggrieved party discovered that an unjust enrichment had occurred. See also 7 Target Technology Co., LLC, v. Williams Advanced Materials, Inc., No. SACV 04-1083 DOC 8 (MLGx), 2008 WL 5002935, *7 (C.D. Cal. Nov. 21, 2008). 9 Counterclaimants base their unjust enrichment claim on the following facts 10 For the Northern District of California United States District Court (see ACC ¶ 76–84): 11 12 13 14 15 16 17 By September 1, 2003, when [counterclaimant] Roy Taylor was fired as CEO, the [Swingless Golf] Bank of America loans amounted to . . . $14,939.59 plus interest. On September 1, 2003, [Swingless Golf] closed its bank account with Bank of America and opened a new one in a new bank. . . . Because the Swingless bank account was closed and Roy Taylor had used his personal assets as collateral for the [Swingless Golf] loans, Bank of America quickly began collections proceedings directly from Roy Taylor. . . . Roy Taylor attempted to transfer these loan balances to [Swingless Golf] but [Swingless Golf] refused to acknowledge these loans and did not repay them. . . . As a direct and proximate cause of plaintiff’s actions, Roy Taylor suffered damages of the $14,939.59 balance plus interest. 18 Counterdefendants DePorche and Taylor argue that the unjust enrichment claim — first 19 alleged by counterclaimants on September 13, 2009 — does not fall within the three year statute 20 of limitations set forth in Section 338(d) (Dkt. No. 65). They emphasize counterclaimants’ own 21 allegations that Swingless Golf closed its account with Bank of America on September 1, 2003, 22 and Bank of America then “quickly” began collections against counterclaimant Roy Taylor (Br. 23 8). As a result, counterdefendants argue that counterclaimant Roy Taylor discovered the closing 24 of the Bank of America account in approximately September 2003 and discovered the non25 repayment of the loans shortly thereafter. Given this plausible reading of the allegations, the 26 statute of limitations for the unjust enrichment counterclaim appears to have expired in late 2006. 27 In other words, counterclaimants are almost three years too late. 28 11 1 2 argument that SGCC — the Wyoming corporation — was not established until approximately 3 August 2006 and they did not learn of the non-issuance of the shares of stock until approximately 4 September 2006 is completely irrelevant to the allegations underlying their unjust enrichment 5 claim, which is predicated solely on the non-repayment of the Bank of America loans. For the Northern District of California 6 United States District Court Presented with this hurdle, counterclaimants try to leap but not very high. Indeed, their Based upon a plausible reading of the facts alleged by counterclaimants themselves, Roy 7 Taylor had knowledge of the alleged unjust enrichment in approximately late 2003. The 8 applicable statute of limitations on this claim therefore expired in approximately late 2006, far 9 before the claim was brought in this action. As such, the motion to dismiss the unjust enrichment 10 counterclaim is GRANTED. Because of this determination, this order need not address the parties’ 11 various arguments going to the merits of this counterclaim. 12 4. COUNTERCLAIM FOUR: BREACH OF IMPLIED CONTRACT AGAINST COUNTERDEFENDANTS DEPORCHE AND TAYLOR. 13 This counterclaim is also based on counterdefendants’ alleged non-repayment of the Bank 14 of America loans discussed above, but here counterclaimants assert that Swingless Golf breached 15 “an implied contract that [it] would reimburse Roy Taylor for the debts incurred for [Swingless 16 Golf]’s benefit” when it failed to repay counterclaimant Roy Taylor for the loans (ACC ¶ 93). 17 Counterdefendants DePorche and Taylor again argue that the applicable statute of 18 limitations has expired on this claim. Indeed, Section 339(1) of the California Code of Civil 19 Procedure states that an action for breach of implied contract has a two year statute of limitations 20 that begins when the loss of damage suffered by the aggrieved party is discovered. 21 Counterclaimants, as with the prior counterclaim, fail to respond to this argument in their 22 opposition. 23 As explained in the prior section, counterclaimant Roy Taylor learned of Swingless Golf’s 24 alleged non-repayment of the Bank of America loans in approximately late 2003, and the 25 applicable statute of limitations began to run at that time. As a result, the two year statute of 26 limitations expired in approximately late 2005, far before this counterclaim was brought. The 27 motion to dismiss the breach of implied contract counterclaim is GRANTED. As a result, this 28 order need not address the parties’ various arguments regarding the merits of this counterclaim. 12 1 5. 2 Claims of corporate waste in California are based upon Delaware state law. The elements 3 of such a claim are as follows: 4 To recover on a claim of corporate waste, [defendants] must shoulder the burden of proving that the exchange was so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. See In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006) (A claim of waste will arise only in the rare, unconscionable case where directors irrationally squander or give away corporate assets. This onerous standard for waste is a corollary of the proposition that where business judgment presumptions are applicable, the board’s decision will be upheld unless it cannot be attributed to any rational business purpose.). 5 6 7 8 For the Northern District of California 9 United States District Court COUNTERCLAIMS FIVE AND SIX: CORPORATE WASTE. 10 In re Asyst Technologies, Inc. Derivative Litigation, No. C-06-04669 EDL, 2008 U.S. Dist. 11 LEXIS 41173, *30 (N.D. Cal. May 23, 2008) (quotation marks omitted). See also Navellier v. 12 Sletten, 262 F.3d 923, 937 (9th Cir. 2001) (same). To meet this burden, counterclaimants must 13 allege “particularized facts,” or, “[p]ut another way, [counterclaimants] must show that the [act] 14 in question either served no corporate purpose or was . . . completely bereft of consideration.” 15 Ash v. McCall, No. 17132, 2000 Del. Ch. LEXIS 144, 23 (Sept. 15, 2000). 16 17 18 Two corporate waste theories are presented by counterclaimants. Each is now addressed in turn. A. Counterclaim Five: Corporate Waste (Misuse of Investor Funds) Against Counterdefendants DePorche and Taylor. 19 Counterclaimants first allege that counterdefendants DePorche and Taylor engaged in 20 corporate waste by misusing investor funds. To support this theory, counterclaimants allege that 21 they invested approximately $315,000 in Swingless Golf, but that “[Swingless Golf] and its 22 successor SGCC have misused these funds, in that the corporations have not developed the 23 product for many years, and has [sic] not made any actual attempts to sell the product, thereby 24 guaranteeing that the investors would not be repaid” (ACC ¶¶ 99, 100). In their motion to 25 dismiss, counterdefendants argue that particularized facts have not been sufficiently alleged to 26 show that these acts served no legitimate corporate purpose. 27 Although there is a stringent standard to prove a claim of corporate waste at trial, 28 counterclaimants need only state a plausible claim of corporate waste to survive a motion to 13 1 dismiss under Iqbal. The less stringent standard is satisfied here. Indeed, counterclaimants state 2 that, although hundreds of thousands of dollars were invested in the company, for “many years” 3 the company neither developed nor attempted to sell its namesake product (Id. ¶ 100). These 4 facts alone render it plausible that the alleged inaction served no legitimate corporate purpose, 5 even if they might be insufficient to meet a more stringent burden of proof at later stages in the 6 proceedings. But, at least at present, counterclaimants’ allegations state a claim for conversion 7 that is plausible on its face, and the motion to dismiss counterclaim five is DENIED. 8 B. Counterclaim Six: Corporate Waste (Abandonment of Patents) Against Counterdefendants SGCC, DePorche, and Taylor. 9 Counterclaimants separately allege that all counterdefendants engaged in corporate waste 10 (Id. ¶¶ 103–105): For the Northern District of California United States District Court through patent abandonment. To support this theory, counterclaimants allege the following facts 11 12 13 14 15 16 17 18 In 2007, [counterclaimant] Roy Taylor reclaimed the patents and paid $2,020.00 in Patent Maintenance Fees on Patent 5,522,594. Had he not done so, the patents stood to become abandoned. . . . SGCC had made no move to maintain the patents. . . . As the patents are the one valued assets [sic] of SGCC, this amounts to corporate waste due to the decision of the Board of Directors including [DePorche] and [Joyce Taylor]. This decision was made without regard that abandonment of the patents would allow them to come to the market to be taken by competitors. Without the actions of [counterclaimant Roy] Taylor to save the patents their would be no qualified assets of Swingless thus depriving all [counterclaimants] their right to recover investments in time and monies. 19 Unlike the previous theory, this claim does not allege sufficient factual allegations to meet 20 the plausibility standard under Iqbal. As stated earlier, the burden in this case is on 21 counterclaimants to allege particularized facts that make it plausible that the act in question 22 “either served no corporate purpose or was . . . completely bereft of consideration.” Here, 23 counterclaimants clearly state that counterdefendants did nothing up until the point that 24 counterclaimant Roy Taylor paid the one patent maintenance fee in 2007. These facts alone are 25 insufficient to demonstrate abandonment, since there is no allegation that counterdefendants 26 would have actually allowed abandonment to occur. 27 Indeed, had counterclaimant Roy Taylor not acted to save the patent in question, it is 28 unclear whether counterdefendants would have continued to do nothing or whether 14 1 counterdefendants would have paid the fee. Counterclaimants neither state when the maintenance 2 fee in question was due, nor is it clearly alleged that failure to timely pay the maintenance fee as 3 to one patent would cause all of SGCC’s patents to be abandoned and unsalvageable. Roy 4 Taylor’s apparent preemptive payment of a maintenance fee to prevent a possible abandonment of 5 the patent at some future time is not sufficient to show actionable wrongdoing by 6 counterdefendants. In sum, counterclaimants have not alleged sufficient facts to state a plausible claim for 8 corporate waste due to abandonment of patents, and therefore the motion to dismiss counterclaim 9 six is GRANTED. 10 6. COUNTERCLAIM SEVEN: BREACH OF FIDUCIARY DUTIES AGAINST COUNTERDEFENDANT DEPORCHE. 11 Counterclaim seven alleges that counterdefendant DePorche breached various fiduciary For the Northern District of California United States District Court 7 12 duties owed to counterclaimants. A claim for breach of fiduciary duties in California requires a 13 finding that: (1) counterdefendant DePorche owed a fiduciary duty to the party in question; (2) 14 the duty was breached; and (3) the breach caused the harm suffered. First Interstate Bank of 15 Arizona, N.A., v. Murphy, Weird and Butler, 210 F.3d 983, 986 (9th Cir. 2000). 16 Counterclaimants allege the following facts in support of this counterclaim. First, as part 17 of their general allegations, counterclaimants suggest DePorche breached a fiduciary duty owed 18 to Swingless Golf shareholders (including counterclaimants) by failing to (ACC ¶ 60): 19 20 21 22 23 24 25 [E]nsure that the corporation is operated in a legal manner to ensure a continual business and decisions that are appropriate. [DePorche] and [Joyce Taylor] have failed to act in such a manner by refusing to provide any material data as to the operation of Swingless Golf to [counterclaimant Roy] Taylor a 30% shareholder. Further [DePorche] and [Joyce Taylor] have failed to provide any accounting or assessment as to the operational condition related to the product line, marketing maintenance of the patents, potential sales, and on going operation of the corporation. Additionally, [counterdefendants DePorche] and [Joyce Taylor] have failed to hold noticed share holder meetings, issue shares as required, produce any accounting of the business operation, or produce quarterly, or annual reports of the business operations. 26 However, when setting forth the counterclaim itself, counterclaimants suggest that DePorche 27 breached a fiduciary duty owed to Swingless Golf the corporation (id. ¶¶ 107–109): 28 15 1 107. [Counterclaimants] re-allege and incorporate Paragraphs 1106, inclusive. 108. [Swingless Golf]’s Board of Directors owed fiduciary duties of loyalty and care to [Swingless Golf]. 109. [Swingless Golf]’s Board of Directors are liable for all reasonable damages that flow from the intentional breach of [counterclaimants] as decided by this Court. 2 3 4 5 6 7 counterclaim is directed at a breach of fiduciary duties owed to the corporation itself, to the 8 shareholders, or to both. As a result, counterdefendants move to dismiss solely on the ground that 9 counterclaimants have not sufficiently alleged that Swingless Golf the corporation was damaged 10 11 For the Northern District of California United States District Court In their motion to dismiss, counterdefendants appear confused as to whether this by such a breach. This is insufficient to warrant dismissal. While the three paragraphs setting forth the 12 counterclaim itself make no specific reference to fiduciary duties owed to Swingless Golf 13 shareholders, paragraph 107 specifically re-alleges and incorporates the prior paragraphs that do 14 (See id. ¶¶ 60, 107). Indeed, counterdefendants acknowledge the same in their motion (Br. 15 12–13). Moreover, counterdefendants expressly acknowledge that directors of a corporation owe 16 fiduciary duties to both the corporation itself and the corporation’s shareholders (Br. 18). See 17 also United States v. O’Hagen, 521 U.S. 642, 652 (1997). 18 Despite these concessions, counterdefendants never address the sufficiency of defendants’ 19 claim that DePorche breached duties owed to Swingless Golf shareholders (i.e., to 20 counterclaimants themselves). By contrast, they concede that counterclaimants have sufficiently 21 alleged that fiduciary duties as to shareholders were breached. Indeed, counterclaimants 22 emphasize throughout their amended counterclaims the extent of the financial losses that they 23 allege were proximately caused by DePorche’s breach of this duty. 24 In sum, counterclaimants have alleged sufficient facts to state a plausible claim for breach 25 of fiduciary duty owed to Swingless Golf shareholders. As such, the motion to dismiss 26 counterclaim seven must be DENIED. 27 28 16 1 8. COUNTERCLAIM EIGHT: CORPORATE ABUSE AGAINST COUNTERDEFENDANTS DEPORCHE AND TAYLOR. 2 Counterclaim eight alleges “corporate abuse” by counterdefendants DePorche and Taylor 3 in the following manner (ACC ¶ 111): 4 5 6 7 8 9 For the Northern District of California United States District Court 10 110. Defendants re-allege and incorporate paragraphs 1–109, inclusive. 111. Failure to hold shareholders’ meetings and keeping shareholders uninformed of the intentional acts of failure to develop the patents or divulge the failure to maintain the patents properly under the United States Patent Office, failure to maintain marketing and managing the patent asset, and failure to allow moving parties the right to utilize the patents as they were designed. As such the Board of Directors are liable for all reasonable damages that flow from the intentional breach of Defendants as decided by this Court. 11 There are numerous deficiencies with this counterclaim. First, it is unclear exactly to what 12 corporate duty or duties the “breach” in paragraph 111 refers. While paragraph 110 incorporates 13 all prior allegations made by counterclaimants into this counterclaim, this does not remedy this 14 facial ambiguity. Second, neither the undersigned nor counterdefendants could not find any 15 recognized cause of action for “corporate abuse” under California law. 16 In their opposition, counterclaimants’ sole argument is that the exact same facts as those 17 that form the basis for their breach of fiduciary duty counterclaim apply here, and this should be 18 sufficient to survive a motion to dismiss (Opp. 9). Assuming, therefore, that the “breach” 19 mentioned in paragraph 111 is a breach of fiduciary duty, this would transform the “corporate 20 abuse” counterclaim into a restatement of counterclaim seven, but under a different name and 21 addressed to an additional party. 22 Regardless, such guessing games would be unnecessary if this counterclaim were 23 sufficiently pled under FRCP 8. Because of the factual and legal deficiencies noted above, 24 plaintiff’s counterclaim of “corporate abuse” fails to state a plausible claim, and therefore the 25 motion to dismiss counterclaim eight must be GRANTED. 26 27 28 17 1 2 CONCLUSION For the foregoing reasons, the motion to dismiss the amended counterclaims is hereby 3 GRANTED IN PART and DENIED IN PART. Specifically, the motion is GRANTED as to the 4 following: 5 1. Counterclaim 3: Unjust enrichment against counterdefendants James DePorche and Joyce Taylor; 2. Counterclaim 4: Breach of implied contract against counterdefendants James DePorche and Joyce Taylor; 3. Counterclaim 6: Corporate waste (abandonment of patents) against counterdefendants SGCC, James DePorche, and Joyce Taylor; and 4. Counterclaim 8: Corporate abuse against counterdefendants James DePorche and Joyce Taylor. 6 7 8 9 For the Northern District of California United States District Court 10 11 And DENIED as to the following: 12 1. Counterclaim 1: Fraud against counterdefendants James DePorche and Joyce Taylor; 2. Counterclaim 2: Conversion against counterdefendants James DePorche and Joyce Taylor; 3. Counterclaim 5: Corporate waste (misuse of investor funds) against counterdefendants James DePorche and Joyce Taylor; and 4. Counterclaim 7: Breach of fiduciary duties against counterdefendant James DePorche. 13 14 15 16 17 18 If counterclaimants wish to amend their counterclaims in light of the above dismissals, an 19 administrative motion requesting leave to do so must be filed with the Court no later than NOON 20 ON WEDNESDAY, DECEMBER 30, 2009. 21 how they rectify the defects identified in this order. The motion must describe the proposed amendments and 22 Additionally, counsel are reminded that the trial will occur on September 20, 2010, and 23 they are encouraged to suspend their motion practice in favor of preparing their cases for trial. 24 25 IT IS SO ORDERED. 26 27 Dated: December 24, 2009. WILLIAM ALSUP UNITED STATES DISTRICT JUDGE 28 18
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