Canam Steel Corporation v. Mayo, et al.,

Filing 42

MEMORANDUM and ORDER signed by Judge Morrison C. England, Jr on 8/27/09 ORDERING that Plaintiff 's Motion to Dismiss 33 is GRANTED with leave to amend. Plaintiff may (but is not required to) file an amended complaint, not later than twenty (2 0) days after the date this Memorandum and Order is filed electronically. Nevertheless, if no amended complaint is filed within said twenty (20)-day period, without further notice, those causes of action dismissed by virtue of this Order will be deemed to have been dismissed with prejudice. (Mena-Sanchez, L) Modified on 11/4/2009 (Mena-Sanchez, L).

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Because oral argument will not be of material assistance, the Court ordered this matter submitted on the briefing. E.D. Cal. Local Rule 78-230(h). 1
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UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA

CANAM STEEL CORPORATION, Plaintiff, v. JOHN MAYO, et al., Defendants.

NO. 2:09-cv-00672-MCE-KJM

MEMORANDUM AND ORDER

----oo0oo---Plaintiff Canam Steel ("Plaintiff") initiated this action against Defendants John Mayo ("Mayo"), Cadela Steel, Inc. ("Cadela"), JD2, Inc. ("JD2"), and The Spectrus Group, Inc. ("Spectrus"). Plaintiff seeks relief both directly on its own Presently before the

behalf and derivatively on behalf of JD2.

Court is Defendants' Motion for Partial Judgment on the Pleadings with respect to Plaintiff's fourth and sixth direct claims. the following reasons, Defendants' Motion is granted.1 /// For

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BACKGROUND2

In 1993, Mayo formed JD2, a closely-held corporation, to compete in the steel manufacturing and construction industry. January of 2002, Mayo approached Plaintiff, a supplier of steel products, regarding investing in JD2. Mayo made certain In

financial and informational disclosures to Plaintiff, and the parties entered into two written agreements, a Stock Purchase Agreement and an Incorporated Stockholders Agreement ("Stockholders Agreement"). Pursuant to these agreements, and in reliance on further disclosures of financial and other information, Plaintiff invested a total of $2.85 million in JD2, becoming holder of twenty-five percent of the outstanding shares of JD2 common stock, which, as of December 2007, was worth approximately $10 million. Mayo owns the remaining seventy-five percent of the

outstanding common stock shares. Pursuant to the Stockholders Agreement, the JD2 shareholders elected one director to the Board and Mayo appointed the remaining directors. Mayo subsequently formed Spectrus to pursue business opportunities concerning certain proprietary technology. Spectrus eventually became a wholly-owned subsidiary of JD2. /// /// /// The following facts are derived from Plaintiff's First Amended Complaint ("FAC"). 2
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From the time the Directors were first elected to the Board, until December of 2007, the Board held only one meeting, in approximately February 2005. According to Plaintiff, after that

meeting, to the exclusion of Plaintiff, Mayo alone began to control the corporation. Moreover, Plaintiff alleges that Mayo

failed to adhere to corporate formalities by, for example, failing to convene an annual shareholders' meeting. Mayo also

allegedly failed to conduct JD2's business and financial affairs with the requisite transparency. Plaintiff further alleges that Mayo breached contractual obligations to Plaintiff by: 1) failing to call meetings of the Board and instead directing all financial and business matters independently; 2) failing to call any shareholders' meetings and making decisions pertaining to compensation and dividends without shareholder input; 3) failing to prepare and obtain approval of annual budgets; 4) failing to obtain unanimous written consent of shareholders despite contractual requirements; and 5) failing to provide audited financial statements. Plaintiff also contends that Mayo engaged in "gross mismanagement and self-dealing" by: 1) paying himself and other officers excessive compensation; 2) improperly sharing equipment, office space, and personnel with, as well as improperly loaning funds to, Cadela, a recently formed business that Mayo established as a steel fabrication concern; 3) improperly leasing property from an entity owned in equal shares by Mayo and another JD2 officer; 4) arranging to loan funds from JD2 to himself for the purchase of vacation property; and 5) using JD2 funds for personal items and expenses, such as the purchase of two vehicles. 3

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Finally, Plaintiff alleges that by, inter alia, failing to obtain letters of credit, guarantees, and other security, JD2 so mismanaged its involvement in one project that it is now owed approximately $4.3 million in uncollectible accounts receivables. Accordingly, on March 11, 2009, Plaintiff filed the instant action asserting Breach of the Stock Purchase Agreement, Breach of Fiduciary Duty, and requesting establishment of a Constructive or Resulting Trust, an Accounting, and Equitable Relief for Shareholder Oppression. On May 26, 2009 the Court ruled on Defendants' Motions to Dismiss Plaintiff's third through sixth causes of action. Court granted the Defendants' Motions to Dismiss the third, fourth, and fifth claims with leave to amend. On June 10, 2009, The

Plaintiff filed its FAC alleging both derivative and direct claims. Plaintiff's third and fifth claims are derivative and

based on debts to JD2, while Plaintiff contends that the fourth and sixth direct claims are based upon debts and harm suffered by Plaintiff and improper withholding of their property. Defendants

now move for partial judgment on the pleadings to dismiss Plaintiff's fourth and sixth causes of action.

STANDARD

A motion for judgment on the pleadings pursuant to Rule 12(c) challenges the legal sufficiency of the opposing party's pleadings. Westlands Water Dist. v. Bureau of Reclamation, 805

F. Supp. 1503, 1506 (E.D. Cal. 1992). /// 4

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Any party may move for judgment on the pleadings after the pleadings are closed but within such time as to not delay trial. Fed. R. Civ. P. 12(c). The standard for evaluating a motion for judgment on the pleadings is essentially the same as the standard applied to a Rule 12(b)(6) motion. Dworkin v. Hustler Magazine, Inc., 867 A motion for judgment on the

F.2d 1188, 1192 (9th Cir. 1989).

pleadings should only be granted if, accepting as true all material allegations contained in the nonmoving party's pleadings, the moving party "`clearly establishes that no material issue of fact remains to be resolved and that he [or she] is entitled to judgment as a matter of law.'" Doleman v.

Meiji Mut. Life Ins. Co., 727 F.2d 1480, 1482 (9th Cir. 1984) (quoting Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1368 (1969)); Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1550 (9th Cir. 1989). Judgment on the pleadings is also proper when there is either a "lack of cognizable legal theory" or the "absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988) (in the context of a Rule 12(b)(6) motion). Courts have discretion to grant leave to amend in conjunction with motions made pursuant to Rule 12(c). Moran v.

Peralta Cmty. Coll. Dist., 825 F. Supp. 891, 893 (N.D. Cal. 1993) (citing Amersbach v. City of Cleveland, 598 F.2d 1033, 1038 (6th Cir. 1979). /// /// 5

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Generally, leave to amend a complaint is denied only if it is clear that the deficiencies of the complaint can not be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655,

658 (9th Cir. 1992).

ANALYSIS

A direct action lies only if damages incurred by the shareholder were not incidental to the damages to the corporation. (2005). Schuster v. Gardner, 127 Cal. App. 4th 305, 313

Plaintiff claims that Shuster is inapplicable here

because Plaintiff does not claim a loss in the value of its stock holdings. Rather, Plaintiff alleges that Mayo used Spectrus to FAC,

keep money and other property which belongs to Plaintiff. 8:5-8.

Nevertheless, it remains unclear whether the property to

which Plaintiff refers is in actuality property in which Plaintiff has an interest only as a shareholder. Indeed,

Plaintiff has not alleged any factual distinction between its own property and that of the corporation. Accordingly, because Plaintiff has not pled sufficient facts indicating Defendants obtained money or other property belonging solely to Plaintiff and unrelated to the value of their stock (i.e. JD2 corporate assets and net worth), Defendants' Motion for Partial Judgment on Plaintiff's fourth and sixth direct claims is granted with leave to amend. /// /// /// 6

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CONCLUSION

For the reasons just stated, Plaintiff's Motion to Dismiss is GRANTED with leave to amend. Plaintiff may (but is not

required to) file an amended complaint, not later than twenty (20) days after the date this Memorandum and Order is filed electronically. Nevertheless, if no amended complaint is filed

within said twenty (20)-day period, without further notice, those causes of action dismissed by virtue of this Order will be deemed to have been dismissed with prejudice. IT IS SO ORDERED. Dated: August 27, 2009

_____________________________ MORRISON C. ENGLAND, JR. UNITED STATES DISTRICT JUDGE

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