-CWH Seneca Ridge Management, LLC v. Children's Choice Learning Centers, Inc., No. 2:2012cv00491 - Document 16 (D. Nev. 2012)
Court Description: ORDER Granting in part and Denying in part 10 Motion to Dismiss. Defendant's Motion to Dismiss is GRANTED, as to the breach of contract claim and DENIED, as to the fraud counts. Signed by Judge James C. Mahan on 07/26/2012. (Copies have been distributed pursuant to the NEF - AC)
Download PDF
<![CDATA[
-CWH Seneca Ridge Management, LLC v. Children&#039;s Choice Learning Centers, Inc. Doc. 16 1 2 3 4 UNITED STATES DISTRICT COURT 5 DISTRICT OF NEVADA 6 7 8 2:12-CV-491 JCM (CWH) SENECA RIDGE MANAGEMENT, LLC, 9 Plaintiff, 10 11 v. 12 CHILDREN’S CHOICE LEARNING CENTERS, INC., 13 14 Defendant. 15 16 ORDER 17 Presently before the court is defendant Children’s Choice Learning Centers, Inc.’s motion 18 to dismiss. (Doc. #10). Plaintiff Seneca Ridge Management has filed an opposition (doc. #12), to 19 which defendant has responded (doc. #13). 20 Factual Background 21 The complaint alleges that, in January, 2006, Christopher Goodwin, chairman of the board 22 of directors of Children’s Choice Learning Centers, Inc., approached Albert Lord, a member of 23 Seneca Ridge Management, with an opportunity to invest in Children’s Choice. Children’s Choice 24 is a company which owns, manages, and controls commercially-run daycare centers at a number of 25 locations around the United States. (Doc. #1). 26 Plaintiff claims that, in February, 2006, John Drake, also an agent of Children’s Choice, 27 provided plaintiff with a prospectus of information relating to the proposed investment. Id. The 28 James C. Mahan U.S. District Judge Dockets.Justia.com 1 prospectus allegedly represented that defendant had entered into a new service agreement which 2 would provide defendant with “[n]ew center commitments from . . . 1,900 hospitals. . . .” Id. Plaintiff 3 alleges that this purported agreement provided the basis for defendant’s further representation in the 4 prospectus that, beginning in 2006, defendant would add 75 new daycare centers over the course of 5 the following five years. Id. As of November, 2011, defendant had only added 33 new centers. 6 Plaintiff alleges that defendant had also represented that it would receive additional income 7 from these centers, specifically predicting that the net income before tax would grow from a 8 $1,899,454 loss in 2006 to a $13,028,594 gain in 2010. Id. 9 Plaintiff alleges that, in order for plaintiff to monitor defendant’s performance and to guard 10 its investment, it was agreed that defendant would name Lord to Children’s Choice’s board of 11 directors and that defendant would schedule regular board meetings, on a monthly basis, unless 12 otherwise determined by the board. Id. 13 Plaintiff entered into four agreements with defendant as of March 24, 2006: (a) an investor’s 14 rights agreement, (b) a preferred stock purchase and exchange agreement, (c) a voting agreement, 15 and (d) a co-sale and first refusal agreement. Id. 16 Plaintiff alleges that: the representations made regarding the services agreement, the 17 projected number of new daycare centers to be added beginning in 2006, the projected performance 18 of those centers, and the agreement to hold monthly board of directors meetings were all knowingly 19 false and untrue statements of material fact. Id. 20 Plaintiff acknowledges that Lord was placed on defendant’s board of directors. Id. However, 21 plaintiff alleges that defendant retained control of the board and prevented it from agreeing to 22 monthly meetings. Id. Plaintiff further claims that defendant limited board members’ contact with 23 senior management and withheld audited financial statements from the board. Plaintiff finally asserts 24 that, as a consequence of the foregoing, plaintiff was not provided the opportunity to discover the 25 breaches of contract and fraud that had been perpetrated by defendant. Id. 26 Plaintiff’s complaint alleges: (1) material breach of contract, (2) breach of contract, and (3) 27 fraud. Id. Wherefore plaintiff prays for rescission of contract pursuant to its first three claims, 28 James C. Mahan U.S. District Judge -2- 1 plaintiff alternatively alleges: (4) breach of contract, and (5) fraud, seeking compensatory damages. 2 Id. 3 Discussion 4 A court may dismiss a plaintiff's complaint for “failure to state a claim upon which relief can 5 be granted.” FED. R. CIV. P. 12(b)(6). A properly pled complaint must provide “[a] short and plain 6 statement of the claim showing that the pleader is entitled to relief.” FED. R. CIV. P. 8(a)(2); Bell 7 Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). While Rule 8 does not require detailed factual 8 allegations, it demands “more than labels and conclusions” or a “formulaic recitation of the elements 9 of a cause of action.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (citation omitted). “Factual 10 allegations must be enough to rise above the speculative level.” Twombly, 550 U.S. at 555. Thus, to 11 survive a motion to dismiss, a complaint must contain sufficient factual matter to “state a claim to 12 relief that is plausible on its face.” Iqbal, 129 S.Ct. at 1949 (citation omitted). 13 In Iqbal, the Supreme Court clarified the two-step approach district courts are to apply when 14 considering motions to dismiss. First, the court must accept as true all well-pled factual allegations 15 in the complaint; however, legal conclusions are not entitled to the assumption of truth. Id. at 1950. 16 Mere recitals of the elements of a cause of action, supported only by conclusory statements, do not 17 suffice. Id. at 1949. 18 Second, the court must consider whether the factual allegations in the complaint allege a 19 plausible claim for relief. Id. at 1950. A claim is facially plausible when the plaintiff's complaint 20 alleges facts that allows the court to draw a reasonable inference that the defendant is liable for the 21 alleged misconduct. Id. at 1949. 22 Where the complaint does not permit the court to infer more than the mere possibility of 23 misconduct, the complaint has “alleged – but not shown – that the pleader is entitled to relief.” Id. 24 (internal quotations omitted). When the allegations in a complaint have not crossed the line from 25 conceivable to plausible, plaintiff's claim must be dismissed. Twombly, 550 U.S. at 570. 26 ... 27 28 James C. Mahan U.S. District Judge -3- 1 Failure to State a Claim 2 In order to establish a claim for breach of contract, plaintiff must allege: (1) the existence of 3 an enforceable agreement between the parties; (2) plaintiff’s performance; (3) defendant’s unjustified 4 or unexcused failure to perform; and (4) damages resulting from the unjustified or unexcused failure 5 to perform. See Nevada Contract Services, Inc. v. Squirrel Companies, 119 Nev. 157, 161 (2003). 6 Plaintiff’s breach of contract claims are premised on defendant’s alleged intentional 7 misstatements of material fact in the prospectus. (Doc. #1). Plaintiff asserts that section 2.24 of the 8 purchase and exchange agreement warrants the accuracy of representations made in the prospectus. 9 (Doc. #12). Plaintiff therefore argues that any falsehoods contained in the prospectus amount to 10 breaches of section 2.24. Id. 11 However, the prospectus was furnished to plaintiff in advance of contract formation. If 12 plaintiff’s assertions are correct, the contract could not have existed, because the agreement was 13 warranting the accuracy of the fraudulent prospectus. In effect, the contract was premised upon 14 defendant’s fraudulent misrepresentations, and, therefore, there was no meeting of the minds. May 15 v. Anderson, 121 Nev. 668, 672 (2005) (a meeting of the minds is required in order to form an 16 enforceable contract). Because plaintiff has not established a valid contract, plaintiff’s claim for 17 breach of contract must fail. Saini v. International Game Technology, 434 F.Supp.2d 913, 919–20 18 (D. Nev. 2006) (the existence of a valid and enforceable contract is a necessary element for 19 establishing a breach of contract claim). 20 As explained below, plaintiff’s allegations are more properly brought as fraud in the 21 inducement. 22 Particularity of the Pleadings 23 In order to establish a cause of action for fraudulent inducement, plaintiff must allege: (1) 24 a false representation made by the defendant; (2) defendant’s knowledge or belief that the 25 representation was false (or defendant’s knowledge that its basis for making the representation was 26 insufficient); (3) defendant’s intent to induce plaintiff to consent to the contract’s formation; (4) 27 plaintiff’s justifiable reliance upon the misrepresentation; and (5) damage resulting from such 28 James C. Mahan U.S. District Judge -4- 1 reliance. J.A. Jones Const. Co. v. Lehrer McGovern Bovis, Inc., 89 P.3d 1009, 1018 (Nev. 2004). 2 In alleging fraud or mistake, a party must state with particularity the circumstances 3 constituting fraud or mistake. FED. R. CIV. P. 9(b). To meet this standard, plaintiff must present 4 details regarding the “time, place, and manner of each act of fraud, plus the role of each defendant 5 in each scheme.” Lancaster Com. Hosp. v. Antelope Valley Hosp. Dist., 940 F.2d 397, 405 (9th Cir. 6 1991). Plaintiff’s complaint must put the defendant on notice of the particular misconduct that 7 defendant is alleged to have committed so that defendant can properly defend against all allegations. 8 Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1104-05 (9th Cir. 2003). 9 Defendant argues that plaintiff’s complaint lacks the requisite particularity for stating a claim 10 of fraud. (Doc. #10). Specifically, that plaintiff has not stated the time, place, or content of the 11 alleged fraud. Id. However, it is clear from the face of plaintiff’s complaint that the fraud is alleged 12 to have taken place between January and March of 2006. (Doc. #1, ¶ 9). The ‘place’ of the fraud was 13 the contents of the prospectus that was furnished to plaintiff. (Doc. #1, ¶¶ 17, 30). And the content 14 of the fraud was that defendant intentionally overstated the projected expansion of defendant’s 15 business for the purpose of inducing plaintiff to invest. (Doc. #1, ¶¶ 17, 32). 16 Defendant argues that plaintiff has failed to explain the way in which defendant’s alleged 17 misrepresentations are false. See Doc. #13:7, citing Arroyo v. Wheat, 10591 F. Supp. 141, 144 (D. 18 Nev. 1984). However, plaintiff’s complaint asserts that “the number of additional day care centers 19 which the Company had represented in its prospectus . . . was overly stated and unreasonably 20 optimistic, and that the projected performance was intentionally overstated.” (Doc. #1 at 5:20-23). 21 The complaint further alleges that “[t]he false representations . . . were reasonably calculated to 22 deceive [plaintiff and to induce] it to enter into the Children’s Choice Agreements and to invest its 23 $5 Million with Children’s Choice.” Id. Such detail sufficiently explains the manner in which 24 defendant’s alleged misrepresentations were false (its projections were overstated). See Arroyo, 591 25 F. Supp. at 144. Accordingly, defendant’s motion to dismiss plaintiff’s claim of fraud is denied. 26 Statute of Limitations 27 The applicable statute of limitations for plaintiff’s claim of fraud is three years. NRS 28 James C. Mahan U.S. District Judge -5- 1 11.190(3)(d). A cause of action for fraud accrues "upon the discovery by the aggrieved party of the 2 facts constituting the fraud or mistake." Id. Discovery, for the purposes of the accrual of the statute 3 of limitations, means "the statute of limitations will not commence to run until the aggrieved party 4 knew, or reasonably should have known, of the facts giving rise to the [tort]." Nevada State Bank 5 v. Jamison Family P’ship, 106 Nev. 792, 800 (1990).When it does not appear from the face of a 6 complaint that a claim is statutorily barred, the issue “becomes a matter of affirmative defense to be 7 pleaded and established by the defendant.” Bank of Nevada v. Friedman, 82 Nev. 417, 422 (1966). 8 Here, plaintiff has not declared the precise point in time when it discovered the facts upon 9 which it bases its allegations of fraud. (Doc. #1). However, plaintiff’s complaint does not indicate, 10 on its face, that the statute of limitations has run. Id. Defendant argues that plaintiff reasonably 11 should have become aware of the facts giving rise to its complaint on, or about, March 24, 2006, 12 when Lord was appointed to defendant’s board of directors. (Doc #10). Defendant further contends 13 that plaintiff must have become aware of the allegedly false representations on January 1, 2009, as 14 defendant had only opened 33 of the 41 new centers that were projected to have been opened by the 15 end of 2008. Id. 16 In a case similar to the one at bar, the First Circuit found that a plaintiff’s position on a 17 defendant’s board of directors, without more, does not establish that the plaintiff is on inquiry notice 18 with regard to acts of fraud perpetrated by the defendant. Young v. Lepone, 305 F.3d 1 (1st Cir. 19 2002). In Young, a corporate shareholder brought an action for securities fraud against the officers 20 of a bankrupt issuing company. Id. The plaintiff-shareholder was a member of the company’s board 21 of directors and had served on the company’s audit committee. Id. at 7. 22 In 1997, an independent auditor notified the audit committee that certain deficiencies in the 23 company’s internal control structure constituted “reportable conditions” that could adversely affect 24 the accuracy of the company’s financial reporting. Id. at 5. The district court dismissed plaintiff’s 25 complaint on the grounds that it was time-barred, finding that a reasonable director in plaintiff’s 26 shoes would have conducted a financial investigation of the company within one year of receiving 27 the 1997 letter. Id. at 7. 28 James C. Mahan U.S. District Judge -6- 1 On appeal, the First Circuit noted that the 1997 letter “contained specific reassurances that 2 the reportable conditions did not represent material weaknesses in the company's reporting systems.” 3 Id. at 11. Furthermore, the auditor had given the company “a clean bill of financial health 4 notwithstanding the contents of the management letters. . . .” Id. Accordingly, the First Circuit 5 reversed, finding that plaintiff’s position on defendants’ board of directors and her receipt of the 6 1997 letter did not necessarily mean that she reasonably should have known about facts giving rise 7 to her claim for securities fraud. Id. at 12. The First Circuit based its decision, in part, on the fact that 8 plaintiff had been assured that there were no irregularities in the company’s accounting which might 9 have aroused suspicion. Id. 10 This court finds Young persuasive. The First Circuit had applied the “discovery rule,” which 11 dictates that a statute of limitations begins to run at the point when plaintiff, “in the exercise of 12 reasonable diligence[,] discovered or should have discovered the fraud of which he complains.” Id. 13 at 8 (citation omitted). The discovery rule is also the standard used in Nevada. See Nevada State 14 Bank, 106 Nev. at 800. 15 As in Young, here, defendant has failed to establish that plaintiff was on inquiry notice. 305 16 F.3d at 11. In this instance, defendant has not even identified a cause for alarm that should have 17 aroused plaintiff’s suspicions akin to the 1997 letter in Young. See id. at 7. Rather, defendant asserts 18 that plaintiff should have been on inquiry notice from the time that plaintiff joined defendant’s board 19 of directors. (Doc. #10). 20 However, plaintiff contends that defendant had limited the board of directors’ meeting 21 schedule, limited the board’s contact with senior management, and withheld pertinent information 22 from the board that might have allowed plaintiff the opportunity to discover the facts underlying its 23 claim. (Doc. #12). Accepting plaintiff’s allegations as true, it is reasonable to infer that plaintiff 24 would not have been on inquiry notice simply as a consequence of joining defendant’s board. 25 Furthermore, defendant’s allegation that plaintiff should have known of the facts underlying 26 its claims on January 1, 2009, on account of the fact that defendant had failed to open its projected 27 number of new centers by that point, is in error. In Nevada Power Co. v. Monsanto Co., the Ninth 28 James C. Mahan U.S. District Judge -7- 1 Circuit held that, under Nevada law, the question of when an alleged wrongdoing “was or should 2 have been discovered is a question of fact. It may be decided as a matter of law only when 3 uncontroverted evidence irrefutably demonstrates plaintiff discovered or should have discovered the 4 fraudulent conduct.” 955 F.2d 1304 (9th Cir. 1992) (citation omitted). 5 In that case, plaintiff had purchased electrical generating equipment from defendant which 6 contained polychlorinated biphenyls (“PCBs”). Id. at 1304. Plaintiff had discovered within a few 7 years of purchase that there are hazards associated with PCB exposure yet plaintiff failed to bring 8 a lawsuit within three years of that discovery. Id. at 1307. Consequently, defendant argued that 9 plaintiff’s claims of fraud and failure to warn were statutorily barred. Id. 10 However, the court found that defendant had not met its burden of demonstrating that 11 plaintiff should have discovered the fraudulent conduct upon discovering the dangers of PCBs. Id. 12 Plaintiff had assumed that defendant’s misrepresentation that the equipment was safe was an 13 innocent error attributable to a general lack of scientific understanding of the effects of PCB 14 exposure. Id. Drawing reasonable inferences in favor of the nonmoving plaintiff, the court concluded 15 that, upon discovering the dangers of PCBs, plaintiff had no reason to think that defendant was “any 16 less in the dark about such dangers than the government and scientific community generally were 17 [at the time of the initial sale].” Id. at 1308. 18 Here, it is reasonable to infer that plaintiff would have assumed defendant’s failure to 19 materialize its projected expansion was an honest mistake attributable to the vagaries of business 20 growth. Defendant’s deficient expansion does not irrefutably demonstrate that plaintiff should have 21 suspected that defendant had intentionally misrepresented its projections at the time that it had 22 furnished them to plaintiff. See Nevada Power, 955 F.2d at 1307. Therefore, defendant has not met 23 its burden of establishing that plaintiff’s claims are statutorily barred. 24 ... 25 ... 26 ... 27 ... 28 James C. Mahan U.S. District Judge -8- 1 Accordingly, 2 IT IS HEREBY ORDERED, ADJUDGED, AND DECREED, that defendant’s motion to 3 dismiss is GRANTED, as to the breach of contract claim, and DENIED, as to the fraud counts, 4 consistent with the foregoing. 5 DATED July 26, 2012. 6 7 UNITED STATES DISTRICT JUDGE NITED STATES IT IT D JUDG 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 James C. Mahan U.S. District Judge -9-
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
