-CAB Gray et al v. Preferred Bank et al, No. 3:2009cv02025 - Document 44 (S.D. Cal. 2010)
Court Description: ORDER granting 36 Motion to Dismiss PLAINTIFFS SECONDAMENDED COMPLAINT in its entirety with prejudice. Signed by Judge Dana M. Sabraw on 9/30/10. (All non-registered users served via U.S. Mail Service)(av1)
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-CAB Gray et al v. Preferred Bank et al Doc. 44 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 RAY GRAY, TESLA GRAY, 12 13 CASE NO. 09CV2025 DMS (CAB) Plaintiffs, ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ SECOND AMENDED COMPLAINT vs. 14 PREFERRED BANK, et al., [Doc. 36.] 15 Defendants. 16 17 Pending before the Court is Defendants’ motion to dismiss Plaintiffs’ Second Amended 18 Complaint (“SAC”). Plaintiffs filed an opposition and Defendants filed a reply. For the reasons set 19 forth below, Defendants’ motion is granted. 20 I. 21 BACKGROUND 22 In October 2006, Tesla Gray and Preferred Bank entered into a Construction Loan Agreement 23 (“Loan Agreement”) for a loan of up to $14 million. (SAC ¶ 6.) Ray Gray, Tesla’s father, executed 24 a written guaranty of payment and performance of the Loan Agreement. (Id. at ¶ 7.) In October 2008, 25 Tesla Gray went into Chapter 11 bankruptcy. (Id. at ¶ 9.) Approximately two months later, in 26 December 2008, the parties amended the Loan Agreement and added additional properties as collateral 27 on the loan. (Id. at ¶ 9.) Plaintiffs contend that the amended Loan Agreement was gained through 28 extortion. (Id. at ¶¶ 9, 11, 12.) Specifically, Plaintiffs allege that Defendants sought the amendment -1- 09cv2025 Dockets.Justia.com 1 in order to manipulate Preferred Bank’s stock price, that Tesla Gray did not receive additional 2 consideration for the loan amendment, that the amendment violated the automatic stay imposed by 3 Tesla Gray’s bankruptcy, and that Defendants promised Ray Gray a $20 million loan for ranch 4 properties in northern California and to remove the cross-collateralization it held on two additional 5 properties owned by Ray Gray to induce him into signing an amended guaranty. (Id. at ¶¶ 9-13, 16.) 6 Tesla Gray became delinquent in the loan payments. (Id. at ¶ 16.) Ray Gray did not cure the 7 default, and Preferred Bank filed suit against Ray Gray in San Diego Superior Court on July 27, 2009. 8 (Def. Mem. P. & A. at 3; Defendants’ Request for Judicial Notice in Support of Their Motion to 9 Dismiss Plaintiffs’ First Amended Complaint (“FAC RJN”), Ex. 3.)1 Plaintiffs filed the instant action 10 on September 16, 2009, against Preferred Bank and two of its employees, Theodore Hsu and Brian 11 Jurczak. On December 21, 2009, the Bankruptcy Court converted Tesla Gray’s Chapter 11 bankruptcy 12 into a Chapter 7 bankruptcy. (FAC RJN Exs. 5-6.) Plaintiffs filed a First Amended Complaint on 13 December 17, 2009, which Defendants moved to dismiss on April 16, 2010. (Docs. 14, 19.) On June 14 10, 2010, the Court issued an Order granting Defendants’ motion to dismiss Plaintiffs’ First Amended 15 Complaint and granting Plaintiffs leave to file a Second Amended Complaint. (Doc. 32.) Plaintiffs 16 filed the SAC on June 24, 2010 and Defendants filed the instant motion to dismiss Plaintiffs’ SAC on 17 July 8, 2010. (Docs. 33, 36.) 18 II. 19 LEGAL STANDARD 20 A party may move to dismiss a claim for lack of subject matter jurisdiction under Federal Rule 21 of Civil Procedure 12(b)(1). The burden of establishing subject matter jurisdiction rests upon the party 22 asserting jurisdiction. Tosco Corp. v. Cmtys. for a Better Env’t, 236 F.3d 495, 499 (9th Cir. 2001), 23 overruled on other grounds by Hertz Corp. v. Friend, --- U.S. ---, 130 S.Ct. 1181 (2010); Thornhill 24 Publ’g Co. v. Gen. Tel. & Elecs. Corp., 594 F.2d 730, 733 (9th Cir. 1979). If the Court has subject 25 matter jurisdiction over one or more claims, it may exercise supplemental jurisdiction over “all other 26 claims that are so related to claims in the action within such original jurisdiction that they form part 27 28 1 The Court granted Defendants’ April 16, 2010 Request for Judicial Notice in its June 10, 2010 Order Granting Defendants’ Motion to Dismiss. -2- 09cv2025 1 of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 2 1367(a). 3 A party may move to dismiss a claim under Federal Rule of Civil Procedure 12(b)(6) if the 4 claimant fails to state a claim upon which relief can be granted. The Federal Rules require a pleading 5 to include a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. 6 R. Civ. P. 8(a)(2). The Supreme Court, however, recently established a more stringent standard of 7 review for pleadings in the context of 12(b)(6) motions to dismiss. See Ashcroft v. Iqbal, ___ U.S. 8 ___, 129 S. Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). To survive a motion 9 to dismiss under this new standard, “a complaint must contain sufficient factual matter, accepted as 10 true, to ‘state a claim to relief that is plausible on its face.’” Iqbal, 129 S. Ct. at 1949 (quoting 11 Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual content 12 that allows the court to draw the reasonable inference that the defendant is liable for the misconduct 13 alleged.” Id. (citing Twombly, 550 U.S. at 556). “Determining whether a complaint states a plausible 14 claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its 15 judicial experience and common sense.” Id. at 1950 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d 16 Cir. 2007)). 17 III. 18 DISCUSSION 19 Plaintiffs contend they were the victims of extortion and fraud. The SAC states three claims 20 for relief: 1) violation of federal bankruptcy laws, 11 U.S.C. § 362 et seq.; 2) fraud - intentional 21 misrepresentation; and 3) negligent misrepresentation. Defendants moved to dismiss the SAC in its 22 entirety under Rules 12(b)(1) and 12(b)(6). The Court addresses Defendants’ arguments and Plaintiffs’ 23 claims in turn below. 24 A. Subject Matter Jurisdiction 25 As an initial matter, Defendants argue that the Court lacks subject matter jurisdiction over 26 Plaintiffs’ bankruptcy stay violation claim under 11 U.S.C. § 362 because such claim must be brought 27 in the bankruptcy court, and move to dismiss pursuant to Rule 12(b)(1). Defendants further argue that, 28 because this is Plaintiffs’ only federal law claim, the Court cannot retain supplemental jurisdiction -3- 09cv2025 1 over Plaintiffs’ state law claims. Plaintiffs state in their Opposition brief that they are not in fact 2 asserting a bankruptcy stay violation claim, but “rather, a violation of federal law that forbids a creditor 3 from requiring the bankrupt debtor, Tesla, during the pendency of her bankruptcy, to add to the 4 collateral for an existing loan that preceded her bankruptcy.” (Opp. at 4.) Plaintiffs’ assertion, 5 however, is belied by the face of the SAC, as Plaintiffs’ first claim for relief alleges a “violation of 11 6 U.S.C. 362 et seq of bankruptcy laws.” The Court will therefore address the claim as a bankruptcy 7 stay violation claim. (SAC ¶¶ 22-29.) 8 Defendants are correct that “[b]ankruptcy courts have jurisdiction over ‘all civil proceedings 9 arising under title 11, or arising in or related to cases under title 11,’” including bankruptcy stay 10 violation claims. Davis v. Courington, 177 B.R. 907, 912 (9th Cir. 1995) (quoting 28 U.S.C. § 11 1334(b)). However, whether district courts have concurrent jurisdiction over bankruptcy stay violation 12 claims appears to be a matter of first impression in this Circuit. Defendants rely upon the Second 13 Circuit Court of Appeals’ ruling that claims under 11 U.S.C. § 362 “must be brought in the bankruptcy 14 court, rather than in the district court, which only has appellate jurisdiction over bankruptcy cases.” 15 Eastern Equip. & Servs. Corp. v. Factory Point Nat’l Bank, 236 F.3d 117, 121 (2d Cir. 2001); see also 16 Heghmann v. Town of Rye, 326 F. Supp. 2d 227, 232-33 (D.N.H. 2004). The Eleventh Circuit Court 17 of Appeals, however, came to the opposite conclusion and held that, because 28 U.S.C. § 1334 grants 18 the district courts original jurisdiction over all cases under Title 11, a district court has subject matter 19 jurisdiction over claims for violation of an automatic stay. Justice Cometh, Ltd. v. Lambert, 426 F.3d 20 1342, 1343 (11th Cir. 2005) (declining to follow the Second Circuit’s holding in Eastern Equipment); 21 see also Fant v. Residential Servs. Validated Publ’ns, No. C 06 2206 SI, 2006 WL 1806157, at *4 n.4 22 (N.D. Cal. June 29, 2006) (rejecting defendant’s argument that the court lacked jurisdiction over a 23 claim for violation of bankruptcy stay). The Court finds the holding of the Eleventh Circuit more 24 persuasive and thus, finds it has subject matter jurisdiction over Plaintiffs’ bankruptcy stay violation 25 claim. Accordingly, the Court addresses the merits of Defendants’ motion to dismiss. 26 B. Standing 27 Defendants further argue that the Court must dismiss Plaintiffs’ SAC for lack of standing. In 28 its Order of June 10, 2010, the Court dismissed without prejudice the claims of Plaintiff Tesla Gray -4- 09cv2025 1 alleged in the First Amended Complaint on the basis that she lacked standing to pursue the claims 2 because of her Chapter 7 bankruptcy. (Doc. 32 at 3.) Plaintiffs indicated that they intended to cure 3 this defect by having the bankruptcy trustee assign Tesla Gray’s claims to Plaintiff Ray Gray. The 4 Court stated in its Order that, “[s]hould Plaintiffs elect to file an amended complaint, the standing issue 5 must be cured by that time.” (Id.) Plaintiffs’ SAC, filed on June 24, 2010, states “RAY GRAY has 6 received a fully executed assignment by the trustee of [Tesla Gray’s] bankruptcy whereby TESLA 7 GRAY’s right to prosecute this action has been assigned to RAY GRAY.” (SAC ¶ 3.) However, as 8 evidenced by a copy of the assignment, submitted by Plaintiffs as an exhibit in support of the SAC, 9 the assignment of Tesla Gray’s claims was subject to approval by the Bankruptcy Court. (Doc. 35-1 10 ¶ 17 (“Enforceability and validity of this agreement is conditioned on approval by the United States 11 Bankruptcy Court, Southern District of California . . . . If such condition fails to occur, this Settlement 12 Agreement shall be null and void . . . .”); Opp. at 2 (“Approval by the U.S. Bankruptcy Court of the 13 pending assignment of Tesla’s claims by the trustee confers standing upon Ray to pursue the claims 14 of Tesla held by the trustee of her bankruptcy.”).) The Bankruptcy Court did not approve the 15 assignment of Tesla Gray’s claims to Ray Gray until August 12, 2010, well after Plaintiffs filed the 16 SAC. (SAC RJN Ex. 5.)2 17 Defendants argue that, because the assignment had not been approved by the Bankruptcy Court 18 before Plaintiffs filed their SAC, Tesla Gray’s claims should be dismissed for lack of standing. 19 Because the defect in standing has been cured, the Court declines to dismiss the SAC on this basis and 20 proceeds to discuss Plaintiffs’ claims for relief. 21 C. Violation of Bankruptcy Stay 22 Plaintiffs allege that the amendment to the Loan Agreement, in which Tesla Gray gave 23 additional collateral for the loan, violated the automatic bankruptcy stay imposed by her Chapter 11 24 2 25 26 27 28 On July 8, 2010, Defendants submitted a Request for Judicial Notice in Support of their Motion to Dismiss Plaintiffs’ Second Amended Complaint. On August 13, 2010, Defendants submitted a Reply Request for Judicial Notice in Support of their Motion to Dismiss Plaintiffs’ Second Amended Complaint. These requests are herein collectively referred to as “SAC RJN”. As the documents and fact which Defendants request the Court to take judicial notice of are matters of public record subject to judicial notice under Federal Rule of Evidence 201, Defendants’ request for judicial notice is granted. On August 18, 2010, Plaintiffs also submitted a Request for Judicial Notice in Support of their Opposition to Defendants’ Motion to Dismiss Plaintiffs’ Second Amended Complaint. Plaintiffs’ request for judicial notice is also granted. -5- 09cv2025 1 bankruptcy pursuant to 11 U.S.C. § 362. (SAC ¶ 26.) Plaintiffs further allege that the lien placed by 2 Defendants on the properties posted as additional collateral “prevented Tesla from utilizing the benefit 3 of $10 million in equity for refinancing or sale,” and “[a]s a result, Tesla has been damaged in an 4 amount estimated in the millions of dollars.” (Id. at ¶¶ 28-29.) Defendants argue that Plaintiff Tesla 5 Gray fails to state a claim because 1) the posting of additional collateral occurred during the “gap” 6 period between the filing of an involuntary bankruptcy proceeding against Tesla Gray and the issuance 7 of the order for relief, and 2) she cannot allege a plausible claim for damages caused by the Defendants 8 because the properties posted as collateral were worthless. 9 Under 11 U.S.C. § 342(g)(2), “[a] monetary penalty may not be imposed on a creditor for a 10 violation of a stay in effect under section 362(a) (including a monetary penalty imposed under section 11 362(k)) . . . unless the conduct that is the basis of such violation or of such failure occurs after such 12 creditor receives notice effective under this section of the order for relief.” Tesla Gray’s creditors filed 13 an involuntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern 14 District of California in October 2008. See In re Tesla Gray, No. 08-10753. In December 2008, the 15 parties entered into an amendment to their existing Loan Agreement. (SAC ¶¶ 9, 18.) However, the 16 Bankruptcy Court did not enter an order for relief under Chapter 11 until July 15, 2009. (FAC RJN 17 Ex. 4.) Accordingly, the alleged misconduct occurred during the “gap” period and, pursuant to 11 18 U.S.C. § 342(g)(2), no monetary penalty may be imposed upon Defendants. As the only relief Tesla 19 Gray seeks for the alleged violation of the automatic bankruptcy stay is monetary, Plaintiffs’ claim for 20 violation of the bankruptcy stay is dismissed. 21 D. Fraud - Intentional Misrepresentation 22 Defendants contend that Plaintiffs’ fraud claim fails because 1) Plaintiffs fail to plead fraud 23 with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure, 2) the only new 24 factual allegation in the SAC constitutes an inactionable misrepresentation of law rather than fact, and 25 3) Plaintiffs’ claims that Defendants made false promises are barred by the Parol Evidence Rule. 26 Plaintiffs fail to respond to Defendants’ arguments regarding misrepresentation of law and the Parol 27 Evidence Rule, but argue that they did in fact plead fraud with the requisite particularity. Because the 28 Court finds that Plaintiffs have failed to plead fraud with particularity, it does not address Defendants’ -6- 09cv2025 1 other arguments. 2 The elements of a fraud claim are false representation, knowledge of falsity, intent to defraud, 3 justifiable reliance, and damages. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 4 2003) (citation omitted). Fraud is subject to the heightened pleading standards of Rule 9(b). Fed. R. 5 Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the circumstances 6 constituting fraud or mistake.”). A pleading will be “sufficient under Rule 9(b) if it identifies the 7 circumstances of the alleged fraud so that the defendant can prepare an adequate answer.” Fecht v. 8 Price Co., 70 F.3d 1078, 1082 (9th Cir.1995). The same is true for allegations of fraudulent conduct. 9 Vess, 317 F.3d at 1103-04. In other words, fraud allegations must be accompanied by “the who, what, 10 when, where, and how” of the misconduct charged. Id. at 1106 (citation omitted). 11 Plaintiffs allege that Defendants Theodore Hsu and Brian Jurczak engaged in fraud by inducing 12 Plaintiffs to execute an amendment to their Loan Agreement and a new guaranty agreement by 1) 13 misrepresenting to Tesla Gray that it was legally proper to execute the amendment posting additional 14 collateral in the midst of an involuntary bankruptcy proceeding; and 2) promising Plaintiffs that 15 Preferred Bank would a) lend $20 million to Ray Gray on an unrelated property and b) remove the 16 cross-collateralization it held on two additional properties owned by Ray Gray. (SAC ¶¶ 33, 36-38.) 17 Plaintiffs also allege that “during the months of October through December 2008 and 2009, 18 THEODORE HSU and BRIAN JURCZAK engaged in fraud and fraudulent stock manipulation in Los 19 Angeles County.” (SAC ¶ 31.) With respect to the alleged promises made by Defendants Theodore 20 Hsu and Brian Jurczak, Plaintiffs allege that the fraud occurred “during the months prior to December 21 2008 and on or about December 21, 2008 . . . in Los Angeles County.” (SAC ¶¶ 36, 37.) Such 22 pleading fails to satisfactorily set forth the who, what, where, when, and how of the alleged misconduct 23 so that Defendants may prepare an adequate answer and is insufficient to meet the requisite 24 particularity under Rule 9(b). Accordingly, Plaintiffs’ claim for fraud is dismissed. 25 E. Negligent Misrepresentation 26 “It is well-established in the Ninth Circuit that both claims for fraud and negligent 27 misrepresentation must meet Rule 9(b)’s particularity requirements.” Neilson v. Union Bank of Cal., 28 N.A., 290 F. Supp. 2d 1101, 1141 (C.D. Cal. 2003); see also Lopez v. U.S. Bank Nat’l Ass’n, No. -7- 09cv2025 1 10cv978 BTM (BGS), 2010 WL 3463622, at *3 (S.D. Cal. Aug. 31, 2010). As Plaintiffs’ claim for 2 negligent misrepresentation is based upon the same allegations as is their fraud claim, it similarly is 3 not pled with the requisite particularity required under Rule 9(b). Accordingly, Plaintiffs’ negligent 4 misrepresentation claim is dismissed. 5 IV. 6 CONCLUSION 7 8 For the reasons set forth above, Defendants’ motion to dismiss is granted. Plaintiffs’ Second Amended Complaint is dismissed in its entirety with prejudice.3 9 IT IS SO ORDERED. 10 DATED: September 30, 2010 11 12 HON. DANA M. SABRAW United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 Plaintiffs argue in their Opposition that Defendants’ actions are in violation of the Bank Holding Company Act, 12 U.S.C. § 1972 (“BHCA”), a claim not raised in the SAC. (Opp. at 4-5.) Plaintiffs assert that the Court has jurisdiction over this federal question and request leave to file a third amended complaint containing a claim for relief under the BHCA. (Id. at 5.) However, as it appears clear that Plaintiffs could not allege a plausible claim for relief under this statute, their request for leave to amend on this basis is denied. As to the claims for relief alleged in the SAC, Plaintiffs have had ample opportunity to plead a case and have failed to do so. Accordingly, Plaintiffs are not granted leave to amend. -8- 09cv2025
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