-GWF Name Intelligence Inc et al v. McKinnon et al, No. 2:2010cv01202 - Document 136 (D. Nev. 2012)
Court Description: ORDER Denying 109 Motion to Dismiss. Signed by Chief Judge Robert C. Jones on 7/9/12. (Copies have been distributed pursuant to the NEF - EDS)
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-GWF Name Intelligence Inc et al v. McKinnon et al Doc. 136 1 2 3 4 UNITED STATES DISTRICT COURT 5 DISTRICT OF NEVADA 6 NAME INTELLIGENCE, INC. et al., 7 Plaintiffs, 8 vs. 9 LAUCHLIN MCKINNON et al., 10 Defendants. 11 ) ) ) ) ) ) ) ) ) ) 2:10-cv-01202-RCJ-GWF ORDER 12 This case arises out of a real estate investment agreement. Plaintiffs allege that 13 Defendants have absconded with the money Plaintiffs gave them to invest on their behalf. 14 Pending before the Court is Defendant Charles J. Lybarger’s motion to dismiss. For the reasons 15 given herein, the Court denies the motion. 16 I. FACTS AND PROCEDURAL HISTORY 17 On or about April 26, 2010, Defendant Lauchlin McKinnon contacted Plaintiff Jay 18 Westerdal, the cofounder, CEO, and President of Plaintiff Name Intelligence, Inc. (“NI”), about 19 a business venture (“the Business”)1 to invest in foreclosed real estate in Las Vegas, Nevada. 20 (Compl. ¶¶ 6, 10, July 20, 2010, ECF No. 1). Westerdal and McKinnon met in Mercer Island, 21 Washington on May 21, 2010 and agreed to proceed with the following business plan: (1) NI 22 would provide initial funds; (2) McKinnon and Defendant Jeff Ehlert would use the funds to 23 1 24 25 Plaintiffs call their business venture, which they do not allege is incorporated or registered in any state or licensed to conduct business in Nevada, “the Business.” The Business likely constitutes a common law general partnership. Dockets.Justia.com 1 purchase real property at foreclosure sales; (3) McKinnon and Ehlert would rehabilitate and 2 resell the properties at a profit; and (4) 75% of profits would go to NI and 25% would go to 3 McKinnon. (Id. ¶¶ 10, 12, 14). McKinnon promised a 40% return on investment. (Id. ¶ 13). 4 On or about June 1, 2010 Plaintiffs provided McKinnon and Ehlert with $700,000 in 5 cashier’s checks, and between June 3 and June 8, 2010 McKinnon and Ehlert purchased seven 6 pieces of real property in Las Vegas, Nevada. (Id. ¶¶ 15–19). On June 10, 2010, in response to a 7 June 7, 2010 request from McKinnon, Plaintiffs provided McKinnon and Ehlert with an 8 additional $1 million in cashier’s checks, which Plaintiffs believe McKinnon and Ehlert used to 9 purchase more properties. (Id. ¶¶ 18, 20–21). 10 On or about June 15, 2010, Defendants ceased communications with Plaintiffs, and 11 despite Plaintiffs’ directions to Defendants to cease operating with the capital Plaintiffs 12 provided, Plaintiffs believe Defendants continued to operate with Plaintiffs’ funds or the 13 proceeds thereof. (Id. ¶¶ 22–23). Defendants have refused to return the capital. (Id. ¶ 26). 14 Plaintiffs believe that some of the properties purchased do not exist or were purchased under a 15 name other than Name Intelligence or the Business. (Id. ¶ 27). Also, Plaintiffs believe most or 16 all of their funds were commingled, rather than separated by single-purpose LLC, or were placed 17 into an attorney trust account of former Defendant Charles Lybarger, who represents the 18 Business, McKinnon, and/or Ehlert. (Id. ¶ 28–29). Plaintiffs believe that Lybarger has since 19 distributed the funds to McKinnon and Ehlert. (Id. ¶ 30). 20 Plaintiffs sued Defendants in diversity in this Court on five causes of action: (1) breach 21 of contract; (2) breach of fiduciary duties; (3) accounting; and (4)–(5) violation of the Securities 22 Act of Washington, Wash. Rev. Code (“WRC”) section 21.20.140. (See id.). The Court granted 23 a preliminary injunction against Defendants’ further disposition of Plaintiffs’ funds or real 24 property acquired therewith. (See Prelim. Inj., Aug. 11, 2010, ECF No. 19). Two days before the 25 Court denied Defendants’ motions to dismiss for lack of jurisdiction, Plaintiffs filed the First Page 2 of 8 1 Amended Complaint (“FAC”). The FAC added a sixth cause of action to quiet title to the 2 thirteen properties (the “Properties”) allegedly purchased with Plaintiffs’ funds. Plaintiffs 3 presumably did this to bring the Properties within the Court’s in rem jurisdiction and Defendants 4 within the Court’s quasi in rem jurisdiction should the Court have ruled there was no in 5 personam jurisdiction over Defendants in Nevada. The FAC omitted Lybarger as a Defendant, 6 and Plaintiffs had already voluntarily dismissed Lybarger without prejudice. Defendants 7 stipulated to permit Plaintiffs to file the Second Amended Complaint (“SAC”). The SAC added 8 Michael Vannozzi (the broker as to transactions concerning seven of the Properties) as a 9 Defendant and sought to hold him vicariously liable under a seventh cause of action based upon 10 Ehlert’s actions. Plaintiffs then filed a motion to amend the SAC, which the Court granted. The 11 Third Amended Complaint (“TAC”) names Lybarger as a Defendant and seeks to hold him and 12 others liable for conversion under the newly added eighth cause of action. Lybarger has moved 13 to dismiss for failure to state a claim. 14 II. LEGAL STANDARDS 15 Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the 16 claim showing that the pleader is entitled to relief” in order to “give the defendant fair notice of 17 what the . . . claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47 18 (1957). Federal Rule of Civil Procedure 12(b)(6) mandates that a court dismiss a cause of action 19 that fails to state a claim upon which relief can be granted. A motion to dismiss under Rule 20 12(b)(6) tests the complaint’s sufficiency. See N. Star Int’l v. Ariz. Corp. Comm’n, 720 21 F.2d 578, 581 (9th Cir. 1983). When considering a motion to dismiss under Rule 12(b)(6) for 22 failure to state a claim, dismissal is appropriate only when the complaint does not give the 23 defendant fair notice of a legally cognizable claim and the grounds on which it rests. See Bell 24 Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In considering whether the complaint is 25 sufficient to state a claim, the court will take all material allegations as true and construe them in Page 3 of 8 1 the light most favorable to the plaintiff. See NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th 2 Cir. 1986). The court, however, is not required to accept as true allegations that are merely 3 conclusory, unwarranted deductions of fact, or unreasonable inferences. See Sprewell v. Golden 4 State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). A formulaic recitation of a cause of action 5 with conclusory allegations is not sufficient; a plaintiff must plead facts showing that a violation 6 is plausible, not just possible. Ashcroft v. Iqbal, 556 U.S. 662, 677–79 (2009) (citing Twombly, 7 550 U.S. at 555). 8 9 “Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion. However, material which is properly submitted as part of the 10 complaint may be considered on a motion to dismiss.” Hal Roach Studios, Inc. v. Richard Feiner 11 & Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990) (citation omitted). Similarly, “documents 12 whose contents are alleged in a complaint and whose authenticity no party questions, but which 13 are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) 14 motion to dismiss” without converting the motion to dismiss into a motion for summary 15 judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994). Moreover, under Federal Rule 16 of Evidence 201, a court may take judicial notice of “matters of public record.” Mack v. S. Bay 17 Beer Distribs., Inc., 798 F.2d 1279, 1282 (9th Cir. 1986). Otherwise, if the district court 18 considers materials outside of the pleadings, the motion to dismiss is converted into a motion for 19 summary judgment. See Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th 20 Cir. 2001). 21 III. 22 ANALYSIS Lybarger was named as a Defendant in the original Complaint, wherein Plaintiffs alleged 23 that Lybarger, Ehlert’s attorney, held the funds Plaintiffs had provided to Defendants in a client 24 trust account and had distributed some or all of the funds to McKinnon and/or Ehlert. Plaintiffs 25 voluntarily dismissed Lybarger without prejudice after he attested that he had no such funds Page 4 of 8 1 remaining in his trust account. Plaintiffs added a conversion claim against Lybarger in the TAC, 2 however, based upon Ehlert’s deposition testimony that Lybarger had indeed held Plaintiffs’ 3 funds in a trust account and distributed them to himself and Ehlert without Plaintiffs’ permission, 4 perhaps even after the Court had entered the injunction preventing such distributions. Ehlert 5 testified that Lybarger on his own initiative had disbursed $2500 from the funds to himself and 6 $6800 to Ehlert, and that Ehlert had no idea why Lybarger did this but did not protest. (See 7 Ehlert Dep. 89–96, Jan. 11, 2012, ECF No. 89, at 29). 8 Lybarger argues that he cannot possibly be liable for conversion, because he did not 9 violate Nevada Rule of Professional Conduct (NRPC”) 1.15, which governs the safekeeping of 10 client property. Lybarger is mistaken. Although Plaintiffs will have to prove a conversion, the 11 simple fact that Lybarger did not violate his fiduciary or professional duties to Ehlert does not 12 necessarily mean that he did not convert the disputed property with respect to the rightful owner 13 (allegedly Plaintiffs). Compliance with the rules of professional conduct are not a defense to an 14 independent tort. For example, if a client pays an attorney in kind with a stolen gold watch, it is 15 no defense to a conversion and trover action by the rightful owner of the watch for the attorney 16 to argue that he did not violate the rules of professional conduct with respect to the client who 17 gave him the stolen watch. If the watch was in fact converted in the first instance, the rightful 18 owner may demand trover of the converted property from the present possessor. That possessor 19 may then have a claim against the person who paid him with the converted property, but the 20 rightful owner of the property is entitled to its recovery in any case. 21 “A conversion is defined as a distinct act of dominion wrongfully exerted over another’s 22 personal property in denial of, or inconsistent with his title or rights therein or in derogation, 23 exclusion, or defiance of such title or rights.” Wantz v. Redfield, 326 P.2d 413, 414 (Nev. 1958) 24 (citing 53 Am. Jur. 819). “[C]onversion is an act of general intent, which does not require 25 wrongful intent and is not excused by care, good faith, or lack of knowledge.” Evans v. Dean Page 5 of 8 1 Witter Reynolds, Inc., 5 P.3d 1043, 1048 (Nev. 2000) (citing id.). A third person into whose 2 hands converted property falls, without consideration therefore, is obligated to restore the 3 property to the rightful owner despite a lack of knowledge as to the initial conversion. 18 Am. 4 Jur. 2d Conversion § 57 (2004); accord 90 C.J.S. Trover and Conversion §§ 30–31 (2010) (“It is 5 a conversion to receive property from one who has no right to part with or dispose of such 6 property and then to use, sell, or exercise dominion over it, whether with knowledge of the 7 owner’s rights or in good faith without any notice whatever of the rights of the owner.” 8 (footnotes omitted)). 9 Here, Plaintiffs allege that some of the funds they gave Ehlert and McKinnon were 10 placed into a client trust account controlled by Lybarger. (See Third Am. Compl. ¶¶ 30, 60, Feb. 11 24, 2012, ECF No. 93). They further allege that Lybarger distributed some of these funds to 12 himself, Ehlert, and/or McKinnon. (See id. ¶ 31). These allegations are sufficient to state a claim 13 of conversion against Lybarger. If the facts alleged are taken as true, Lybarger disbursed 14 converted funds not only to those originally liable for the conversion, but also to himself. 15 Lybarger might not in an ordinary case be liable for conversion for simply having returned the 16 disputed funds to Ehlert or McKinnon. The return of converted property to the person(s) who 17 originally gave it to him would appear to cause a claim of conversion against Lybarger to fail, 18 because he did not himself take the property from Plaintiffs, he no longer possesses the 19 converted property, and he has essentially repudiated his original acceptance of it by returning it 20 to the person(s) who originally converted it. However, to the extent that Lybarger has disbursed 21 a portion of the disputed funds from the client trust account to himself, he is potentially liable for 22 a conversion, because to this extent he has wilfully exercised dominion over converted property. 23 The Court will therefore deny the motion to dismiss. 24 25 Plaintiffs also allege, though they need not do so to make out a basic conversion claim, that “Defendant Lybarger was notified by Plaintiffs that the funds contained in his trust account Page 6 of 8 1 belonged to Plaintiffs and that there was a dispute between Plaintiffs and Defendants regarding 2 the use of said funds.” (Id. ¶ 61). In spite of this knowledge, Lybarger disbursed the funds to 3 himself and to Ehlert, and perhaps also to McKinnon. (Id. ¶¶ 63–65). If true, Plaintiffs may be 4 entitled to punitive damages, and Lybarger’s argument that NRCP 1.15 required him to dispose 5 of the funds as his clients demanded is itself incorrect. In his motion, Lybarger quotes NRPC 6 1.15(a)–(d), which provides a duty to maintain and dispose of funds at the direction of a client, 7 but he conveniently omits subparagraph (e): 8 When in the course of representation a lawyer is in possession of funds or other property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the funds or other property as to which the interests are not in dispute. 9 10 11 Nev. R. Prof. Cond. 1.15(e). If Lybarger disbursed funds to Ehlert or himself while aware that 12 Plaintiffs claimed rightful ownership of the entire amount, he may have violated NRPC 1.15(e). 13 Furthermore, in this case, the Court had issued a preliminary injunction reading in 14 relevant part: “Charles J. Lybarger is hereby enjoined and restrained from transferring any funds 15 remaining in his trust account which were invested and/or provided by Name Intelligence, Inc., 16 and Jay Westerdal to Lauchlin McKinnon, Jeff Ehlert or any other third party without 17 authorization from this court.” (Prelim. Inj. 3:17–20, Aug. 11, 2010, ECF No. 19). Therefore, in 18 this case, a transfer of the funds in the trust account after the issuance of the preliminary 19 injunction could constitute contempt of court in addition to conversion and an ethical violation. 20 /// 21 /// 22 /// 23 /// 24 /// 25 /// Page 7 of 8 1 CONCLUSION 2 IT IS HEREBY ORDERED that the Motion to Dismiss (ECF No. 109) is DENIED. 3 IT IS SO ORDERED. 4 Dated this 21st day of June, 2012. Dated this 9th day of July, 2012. 5 6 _____________________________________ ROBERT C. JONES United States District Judge 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 8 of 8
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