Wilson et al v. 604471 Ontario, Inc. et al

Filing 31

ORDER signed by Judge Lawrence K. Karlton on 10/12/12 ORDERING 1 As to Defendant R. Allan Reid's motion to dismiss plaintiffs' First Amended Complaint, plaintiffs and defendant Reid SHALL PROVIDE further briefing on the following question s: [a] Can the court exercise personal jurisdiction over an individual shareholder and officer of a corporation under an alter ego theory if the corporation itself is not a party to the action? [b] If the corporation is a necessary party, may Dura-L oc's actions be imputed to 604471 Ontario for purposes of the exercise of personal jurisdiction? Plaintiffs' brief is due within fourteen (14) days of the effective date of this order. Defendant Reid's brief, if any, is due within twen ty-eight (28) days of the effective date of this order. The parties' briefs are to be no longer than ten (10) pages each. 2 Defendant Metals USA, Inc.'s motion to dismiss plaintiffs' First Amended Complaint for failure to state a claim is GRANTED without prejudice. 3 Plaintiffs are granted leave to conduct discovery under the terms outlined above, to be supervised by the Magistrate Judge. Plaintiffs must file any amended complaint no later than ninety (90) days after entry of this order, but only if discovery provides a basis for well-pleaded allegations of successor liability against Metals USA. (Matson, R)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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JAMES WILSON, an individual,
and JACK WHITE and RITA
WHITE, a married couple,
on behalf of themselves
and all others similarly
situated,
NO. CIV. S-12-0568 LKK/GGH

13
Plaintiffs,
14
v.

O R D E R

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METALS USA, INC., a Delaware
Corporation; R. ALLAN REID,
an individual and DOES 1-100,
inclusive,

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Defendants.
/

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20

Jack

Wilson,

Jack

White,

and

Rita

White

are

the

named

21

plaintiffs in this putative consumer class action, which seeks

22

damages for defective home roofing tiles.1 Their First Amended

23

Complaint (“FAC”) alleges five causes of action: (1) fraudulent

24

concealment/non-disclosure,

(2)

breach

of

express

warranties,

25
26

1

No class certification hearing has been held yet.
1

1

(3) breach of written warranties under the federal Magnuson-Moss

2

Warranty

3

Remedies Act, and (5) violations of Cal. Bus. & Prof. Code § 17200.

4

Defendant R. Allan Reid moves to dismiss the FAC under Fed.

5

R. Civ. P. 12(b)(2). Defendant Metals USA, Inc. moves to dismiss

6

the FAC under Fed. R. Civ. P. 12(b)(6). The motions came on for

7

hearing on October 1, 2012. Having considered the matter, for the

8

reasons set forth below, (i) as to Reid’s motion, the court seeks

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additional briefing on two point of law, and (ii) as to Metals

10

USA’s motion, the court will grant defendant’s motion to dismiss

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without prejudice, while permitting plaintiffs to conduct limited

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discovery as described below.

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I. FACTS

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A. Dura-Loc and the Tiles

15

Act,

(4)

violations

of

California’s

Consumer

Legal

In 1992, Dura-Loc Roofing Systems Limited (“Dura-Loc”) began

16

selling

roofing

17

including California.2 (FAC 8.) This lawsuit concerns alleged

18

defects

19

shingles sold by Dura-Loc (“Tiles”). (FAC 1.)

in

products

several

to

product

consumers

lines

of

in

the

United

stone-coated

States,

steel

roof

20

Plaintiffs allege on information and belief that the Tiles

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were coated with “Colorquartz”-brand granules manufactured by 3M

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Corporation. (FAC 8, 14.) Plaintiffs allege on information and

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24
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26

2

Plaintiffs do not identify the jurisdiction in which DuraLoc was organized, but as they allege that its successor entity,
604471 Ontario Inc., has since sought bankruptcy protection in
Ontario, Canada, the court infers that Dura-Loc was a Canadian
corporation.
2

1

belief that, no later than January 1993, 3M had warned Dura-Loc

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that Colorquartz granules were translucent, would allow ultraviolet

3

(“UV”) rays to penetrate to the surface of roofing tiles, and due

4

to their translucent qualities, should not be used as a surfacing

5

coating on roofing products. (FAC 8, 9, 14.)

6

These

warnings

were

reiterated

in

a

technical

bulletin

7

released by 3M, dated January 1995, which stated that Colorquartz

8

“is not suitable for applications that require protection of a

9

substrate material from ultraviolet exposure.” (FAC 15.)

10

Plaintiffs allege on information and belief that, despite 3M’s

11

warning,

Dura-Loc

manufactured

and

sold

Tiles

12

covered

with

Colorquartz surface coating granules. (FAC 8, 13.)

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Plaintiffs allege on information and belief that Dura-Loc’s

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use of Colorquartz granules allows UV rays to penetrate to the

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surface of the Tiles, which in turn causes the bonding material

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that binds the surface coating to the Tiles to deteriorate,

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degrade, and separate from the Tiles. As a result, the Tiles lose

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their coating and their granular texture, and are left with a

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discolored appearance. (FAC 14.)

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Plaintiffs allege on information and belief that Dura-Loc

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advertised, marketed, sold, and warranted the Tiles in California

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from 1992 to 2006. (FAC 2, 8.)

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Dura-Loc represented that, for a period of 25 years after

24

installation,

the

Tiles

would

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manufacturing defects. (FAC 15.)

26

////
3

be

UV-resistant

and

free

of

1

B. Named plaintiffs

2

On or about June 2004, plaintiff James Wilson, a resident of

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Roseville,

4

residents of Orangevale, California, purchased Tiles through All

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American Roofing, Inc., a reseller of the Tiles. All American

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Roofing provided Wilson and the Whites with sales materials that

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were written, approved, and distributed by Dura-Loc in order to

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market, advertise, and sell the Tiles. These sales materials

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represented that, for a period of 25 years after installation, the

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Tiles would be UV-resistant and that their appearance would not

11

deteriorate so as to substantially affect roof appearance. (FAC 5-

12

7, 13.)

13
14

California,

and

plaintiffs

Jack

and

Rita

White,

Both Wilson and the Whites purchased the Tiles in reliance on
these representations. (FAC 6, 8.)

15

On or about April 2009, the Whites noticed for the first time

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that

the

Tiles

they

had

purchased

for

their

roof

were

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deteriorating. Specifically, the Tiles were losing their stone

18

coating, granular texture, and aggregate and acrylic coating. As

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of the time of the filing of the FAC, the Whites’ tiles had lost

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most of their original color, coating, and texture. (FAC 7.)

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On or about June 2011, Wilson noticed for the first time that

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the Tiles he had purchased for his roof were deteriorating, losing

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their stone coating, granular texture, and aggregate and acrylic

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coating. As of the time of the filing of the FAC, Wilson’s tiles

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had lost most of their original color, coating, and texture. (FAC

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6.)
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1

Dura-Loc at no time disclosed to plaintiffs or the putative

2

class that the Tiles were not UV-resistant and that they contained

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an inherent defect. (FAC 15.)

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C. Metals USA’s purchase of Dura-Loc assets

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Plaintiffs allege on information and belief that, on or about

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2005, Dura-Loc became “acutely aware” that the Tiles’ inherent

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defect was beginning to manifest, as Dura-Loc received (i) an

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unusually large number of warranty claims to repair or replace

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Tiles, and (ii) numerous complaints regarding separation of surface

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granules from the Tiles and discoloration of the Tiles. (FAC 9.)

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On or about May 2006, Defendant Metals USA, Inc. (“Metals

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USA”), a Delaware corporation, purchased all of Dura-Loc’s assets

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for $9.4 million. (FAC 8.)

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The purchase price was nearly $2 million less than Dura-Loc’s

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sales for the previous fiscal year, which totaled $11.3 million.3

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(FAC 3.)

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In its Form 10-Q filed with the U.S. Securities and Exchange

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Commission for the quarterly period ending August 15, 2011, Metals

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USA stated that its Building Products group “recorded a gain of

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3

Plaintiffs allege this fact without qualification on page
3 of the FAC, and then allege it on information and belief on page
9, so that the court is unable to determine the actual state of
plaintiffs’ knowledge as to this fact.
Adding to the court’s confusion is the fact that the entire
FAC is pleaded on information and belief. The court is willing to
infer that this wholesale pleading on information and belief was
an error, given that many individual allegations are also so
pleaded. But any future complaint filed in this action should
comply with federal pleading standards governing allegations made
on information and belief, particularly when alleging fraud.
5

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approximately [$700,000] resulting from a settlement with the

2

previous owners of the Dura-Loc...to cover pre-acquisition warranty

3

claims.” (FAC 4.)

4

Plaintiffs allege on information and belief that under the

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purchase agreement, Metals USA did not expressly assume any of the

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warranty obligations or liabilities of Dura-Loc. (FAC 9.)

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On or about July 1, 2007, Metals USA created a wholly-owned

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subsidiary known as Metals USA Building Products Canada, Inc.,

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which does business as Allmet Roofing Products. (FAC 8.)

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D. Formation of 604471 Ontario, Inc.

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After the sale, Dura-Loc ceased manufacturing, marketing, and

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selling the Tiles, and changed its name to 604471 Ontario, Inc.

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(FAC 8, 9.) Plaintiffs allege on information and belief that 604471

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Ontario, Inc. maintains the same owners, board of directors, and

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executives as Dura-Loc, but is now a non-operating company that

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currently exists for the sole purpose of receiving, evaluating, ad

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paying warranty claims on the Tiles. (FAC 9.)

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Plaintiffs allege on information and belief that 604471

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Ontario was inadequately capitalized: specifically, that it was

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formed with, and maintained, insufficient funds to honor its

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warranty obligations. (FAC 11.)

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On or about April 2012, 604471 Ontario, Inc. filed for

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bankruptcy in the province of Ontario. In its bankruptcy filing,

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the corporation represented that it had assets totaling $56,265 and

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liabilities totaling approximately $2,000,000. (FAC 9.)

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////
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E. Defendant Reid

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Plaintiffs allege on information and belief that defendant

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Reid was the founder, owner, president, and majority shareholder

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of both Dura-Loc and Metals USA. (FAC 10.)

5

Plaintiffs

allege

significant

on

information

individual

and

control

belief
over

that

the

Reid

6

“exercised

design,

7

engineering, development, manufacture, marketing, and selling of

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the Tiles.” (FAC 10.)

9

Reid approved or directed Dura-Loc to engage in a scheme to

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induce consumers to purchase the Tiles by omitting the fact that

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the Tiles were manufactured with an inherent defect. (FAC 11.) At

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all relevant times, Reid knew of the omission in Dura-Loc’s

13

advertising, and knew it was unlawful for Dura-Loc to represent

14

that the Tiles were UV-resistant and free from defects. (FAC 11.)

15

Plaintiffs

allege

on

information

and

belief

that

Reid

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maintains sole authority with respect to the business decisions of

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604471 Ontario, Inc., including whether to pay or deny warranty

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claims on the Tiles. (FAC 10.)

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F. Further allegations

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Plaintiffs do not allege any fraudulent conduct on the part

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of Metals USA, except for one statement, alleged on information and

22

belief, that “Dura-Loc and Defendant Metals USA entered into this

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purchase transaction with the intent to escape Dura-Loc’s liability

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and warranty obligations for the Tiles which is evidenced by....”

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(FAC 4, 9.)

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Plaintiffs

do

not

allege

that
7

Metals

USA

continued

to

1

advertise, market, sell, or warrant the Tiles after purchasing

2

Dura-Loc’s assets.

3
4
5

Plaintiffs do not allege that the defects in the Tiles caused
damage to any property other than the Tiles themselves.
Plaintiffs do not allege that the defects in the Tiles caused

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injury to any person.

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II. MOTION TO DISMISS UNDER FED. R. CIV. P. 12(b)(2)

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Reid moves to dismiss the FAC under Fed. R. Civ. P. 12(b)(2)4

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on the grounds that the court lacks personal jurisdiction over him

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in this matter.

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A. Standard

12

When a defendant challenges the sufficiency of personal

13

jurisdiction under Rule 12(b)(2), the plaintiff bears the burden

14

of establishing that the exercise of jurisdiction is proper.

15

Sinatra v. National Enquirer, Inc., 854 F.2d 1191, 1194 (9th Cir.

16

1988).

17

Analysis of the appropriateness of the court's personal

18

jurisdiction over a defendant in a case in which the court

19

exercises diversity jurisdiction is resolved under California's

20

long arm statute. Aanestad v. Beech Aircraft Corp., 521 F.2d 1298,

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1300 (9th Cir. 1974). The statute authorizes the court to exercise

22

personal jurisdiction on any basis consistent with the due process

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clause of the United States Constitution. Cal. Code Civ. Proc. §

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410.10; Rocke v. Canadian Auto Sport Club, 660 F.2d 395, 398 (9th

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4

26

Hereinafter, the term “Rule” refers to the applicable
Federal Rule of Civil Procedure.
8

1

Cir. 1981).

2

Consistent with the due process clause, the court may exercise

3

personal jurisdiction over a defendant when the defendant has

4

certain minimum contacts with the forum state such that the

5

maintenance of the suit does not offend traditional notions of fair

6

play and substantial justice. International Shoe Co. v. Washington,

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326 U.S. 310, 316 (1945). If the defendant's activities there are

8

“substantial,” or “continuous and systematic,” a federal court can

9

exercise general personal jurisdiction as to any cause of action

10

involving the defendant, even if unrelated to the defendant's

11

activities within the state. Perkins v. Benguet Consolidated Mining

12

Co., 342 U.S. 437 (1952); Data Disc, Inc. v. Systems Technology

13

Assoc., Inc., 557 F.2d 1280, 1287 (9th Cir. 1977).

14

If a non-resident defendant's contacts with California are not

15

sufficiently continuous or systematic to give rise to general

16

personal jurisdiction, the defendant may still be subject to

17

specific personal jurisdiction on claims arising out of defendant’s

18

contacts with the forum state. Burger King Corp. v. Rudzewicz, 471

19

U.S.

20

Reimbursement Fund, Ltd., 784 F.2d 1392, 1397 (9th Cir. 1986). The

21

court employs a three-part test to determine whether the exercise

22

of specific jurisdiction comports with constitutional principles

23

of due process. Gray & Co. v. Firstenberg Machinery Co., 913 F.2d

24

758 (9th Cir. 1990); Haisten, 784 F.2d at 1397; Data Disc, 557 F.2d

25

at 1287. First, the defendant must “purposefully avail” himself of

26

the privilege of conducting activities in the forum, thereby

462,

477-78

(1985);

Haisten

9

v.

Grass

Valley

Medical

1

invoking the benefits and protections of its laws.5 Second, the

2

claim must arise out of the defendant's forum-related activities,

3

and

4

Haisten, 784 F.2d at 1397. The plaintiff bears the burden of

5

satisfying the first two prongs; if it does so, the burden shifts

6

to the defendant to set forth a “compelling case” that the exercise

7

of jurisdiction would not be reasonable. Sher v. Johnson, 911 F.2d

8

1357, 1361 (9th Cir. 1990); Burger King, 471 U.S. at 477-78.

9

third,

the

exercise

of

jurisdiction

must

be

reasonable.

In determining whether the claim arises out of the defendant's

10

forum-related activities, the Ninth Circuit applies a

11

“but for” test: if plaintiff's injury would not have occurred but

12

for defendant's forum-related activities, the claim arises out of

13

those activities. Ballard v. Savage, 65 F.3d 1495, 1500 (9th Cir.

14

1995). However, where defendant only has isolated contact with the

15

forum state, a high degree of relationship must be shown, i.e. the

16

cause of action must arise out of that particular purposeful

17

contact. Lake v. Lake, 817 F.2d 1416, 1421 (9th Cir. 1987).

18

If a nonresident has purposefully availed himself of the

19

privilege of doing business in California, thus invoking the

20

benefits and protections of its laws, the burden is on the

21
22
23
24
25
26

5

The Ninth Circuit views the Supreme Court’s recent decision
in J. McIntyre Machinery, Ltd., v. Nicastro, __ U.S. __, 131 S.Ct.
2780 (2011) (refusing to uphold personal jurisdiction over foreign
manufacturer that delivered products generally to the U.S. without
directly targeting the forum state through local distributors or
activities) as consistent with the line of cases finding specific
jurisdiction when there has been purposeful direction of products
or activities to the forum state. See Mavrix Photo, Inc. v. Brand
Technologies, Inc., 647 F.3d 1218, 1227-1228 (9th Cir. 2011).
10

1

defendant to show that exercise of jurisdiction does not comport

2

with

3

unreasonable. Burger King, 471 U.S. at 476. To determine whether

4

the exercise of specific personal jurisdiction over a defendant

5

would be "reasonable", the court examines seven factors: 1) the

6

extent of defendant's purposeful interjection into the forum;6 2)

7

the burden of defending the suit in the forum; 3) the extent of

8

conflict with the sovereignty of the defendant's state; 4) the

9

forum state's interest in the dispute; 5) the most efficient forum

10

for judicial resolution of the dispute; 6) the importance of the

11

chosen

12

effective relief; and 7) the existence of an alternative forum.

13

Gray & Co., 913 F.2d at 761.

14

“fair

play

forum

The

to

unique

and

the

substantial

plaintiff’s

burdens

on

a

justice,”

interest

foreign

and

in

is

therefore

convenient

national

defendant

and

of

15

defending itself in the local forum “should have significant

16

weight” in assessing the reasonableness of personal jurisdiction.

17

Asahi Metal Industry Co., Ltd. v. Superior Court, 480 U.S. 102

18

(1987). In addition, litigation against an alien defendant creates

19

a higher jurisdictional bar due to concerns of conflict with the

20

sovereignty of the foreign state. Id. at 115. However, “the factor

21

of conflict with the sovereignty of the defendant's state ‘is not

22

dispositive, because if given controlling weight, it would always

23
24
25
26

6

The Ninth Circuit gives this factor no weight once it is
established that the defendant purposefully availed itself of the
privilege of conducting business of the state, thereby invoking the
benefits and protections of its laws. Sinatra v. National Enquirer,
Inc., 854 F.2d 1191, 1199 (9th Cir. 1988).
11

1

prevent suit against a foreign national in a United States court.’”

2

Sinatra, 854 F.2d at 1199 (quoting Gates Learjet Co. v. Jensen, 743

3

F.2d 1325, 1333 (9th Cir. 1984), cert. denied, 471 U.S. 1066

4

(1985)).

5

B. Analysis

6

1. Can the court exercise personal jurisdiction over Reid as

7

an individual defendant?

8

Defendant Reid moves to dismiss under Rule 12(b)(2), arguing

9

that he is not subject to the court’s personal jurisdiction.

10

Although Reid is the moving party, plaintiffs are the parties who

11

invoked the court’s jurisdiction and therefore bear the burden of

12

proof on the necessary jurisdictional facts. Rio Properties, Inc.

13

v. Rio Int'l Interlink, 284 F.3d 1007, 1019 (9th Cir. 2002).

14

As no evidentiary hearing has been held on these facts,

15

plaintiffs “need only make a prima facie showing of jurisdiction

16

to avoid [Reid's] motion to dismiss.” Harris Rutsky & Co. Ins.

17

Services, Inc. v. Bell & Clements Ltd. (9th Cir. 2003) 328 F3d

18

1122, 1129. A “prima facie” showing must demonstrate facts that,

19

if

20

Ordinarily, the plaintiffs’ version of the facts is taken as true,

21

and

22

plaintiffs’ favor. Id.

true,

would

conflicts

support

between

jurisdiction

sworn

over

affidavits

the

are

defendant.

resolved

in

Id.

the

23

Here, while Reid has submitted a declaration in support of his

24

motion (Docket no. 22-1), plaintiffs rely solely on the unverified

25

FAC in their opposition. The court cannot assume the truth of

26

allegations in a pleading, such as the FAC, that are contradicted
12

1

by a sworn declaration. “If only one side of the conflict [over

2

personal jurisdiction] was supported by affidavit, our task would

3

be relatively easy, for we may not assume the truth of allegations

4

in a pleading which are contradicted by affidavit.” Data Disc, Inc.

5

v.

6

Similarly, the court “need not consider merely conclusory claims,

7

or

8

jurisdiction.” NuCal Foods, Inc. v. Quality Egg LLC, __ F.Supp.2d

9

__, 2012 WL 3528162 (E.D.Cal. 2012) (Mueller, J.) (citations

10

omitted). Therefore, the court will consider well-pleaded facts in

11

the FAC in determining whether plaintiffs have made a prima facie

12

showing of jurisdiction. But where the facts in Reid’s declaration

13

directly contradict those pleaded in the FAC, the court must accept

14

the truth of Reid’s declaration.

Systems

legal

Technology

Assocs.,

conclusions

in

Inc.,

the

557

F.2d

complaint

as

1280,

1284.

establishing

On the facts presented, the court cannot exercise personal

15
16

jurisdiction

over

Reid

on

the

grounds

of

physical

presence,

17

domicile, or consent. Reid was not personally served with process

18

in California. (Reid Dec., Docket no. 22-1, ¶ 4.) He has never

19

resided in California, and there is no evidence to suggest he

20

intends to in the future. (Id. ¶ 4.) Finally, there is no evidence

21

to suggest that Reid has consented, contractually or otherwise, to

22

the court’s jurisdiction.

23

The court also cannot exercise general personal jurisdiction

24

over Reid. Such an exercise of jurisdiction would require that Reid

25

have

26

activities in the state. Data Disc, 557 F.2d at 1287. Reid’s

conducted

“substantial”

or

13

“continuous

and

systematic”

1

declaration provides that he is a Canadian citizen and a lifelong

2

resident of the Province of Ontario, and that he has never been a

3

California resident. (Reid Dec., Docket no. 22-1, ¶¶ 2, 7.) He has

4

never filed a California state income tax return, nor does he own,

5

lease, or maintain any property in the state. (Reid Dec., Docket

6

no. 22-1, ¶¶ 9, 10.) Reid’s only contacts with the state have been

7

(i) approximately three business trips per year when he was Dura-

8

Loc’s president, and (ii) for personal vacations. Therefore, absent

9

an affidavit to the contrary by plaintiff, Reid’s contacts with the

10

state can be presumed neither “substantial” nor “continuous and

11

systematic.” (Reid Dec., Docket no. 22-1, ¶ 4.) The court cannot

12

establish general personal jurisdiction over Reid.

13

The

question

then

becomes

whether

the

court

can

assert

14

specific personal jurisdiction over Reid on claims arising out of

15

his contacts with California. Plaintiffs begin by alleging that

16

Dura-Loc is subject to personal jurisdiction in California.

17

(Plaintiff’s Opp., Docket no. 23, at 6-7.) Dura-Loc advertised,

18

marketed, sold, and warranted the Tiles to California residents —

19

despite knowing that the Tiles were defective. In so doing,

20

plaintiffs claim, Dura-Loc “purposefully availed” itself of the

21

privilege of conducting business in California, thereby invoking

22

the benefits and protections of California’s laws, and satisfying

23

the first prong of the specific jurisdiction test. Haisten, 784

24

F.2d at 1397. Moreover, plaintiffs’ claims arise out of these

25

forum-related

26

Defendants, in turn, do not argue that exercise of personal

activities,

satisfying

14

the

second

prong.

Id.

1

jurisdiction

over

Dura-Loc

would

2

be

unreasonable,

thereby

satisfying the third prong. Id.

3

Plaintiffs conclude by arguing that, since Dura-Loc is subject

4

to the court’s jurisdiction, Reid, as Dura-Loc’s alter ego, is as

5

well. The parties then address most of their briefing to the

6

question of whether plaintiffs have made out a case for alter ego

7

liability.

8

The court is concerned, however, that neither Dura-Loc nor

9

604471 Ontario is a defendant in this action, and therefore seeks

10

further briefing from the parties on the following questions:

11

1. Can the court exercise personal jurisdiction over an

12

individual shareholder and officer of a corporation (Reid) under

13

an alter ego theory if the corporation itself (Dura-Loc, and later,

14

604471 Ontario) is not a party to the action?

15

2. If the corporation is in fact a necessary party, may Dura-

16

Loc’s actions be imputed to 604471 Ontario for purposes of the

17

exercise of personal jurisdiction?

18

A briefing schedule for the parties is set forth at the end

19

of this order. To be clear, no additional briefing is sought as to

20

(i)

21

liability or (ii) whether plaintiffs have properly pleaded Reid’s

22

alter ego liability under such a standard. The parties’ briefing

23

is to focus on the questions raised above.

24

III. MOTION TO DISMISS UNDER FED R. CIV. P. 12(b)(6)

25

A. Standard

26

A

the

choice-of-law

dismissal

or

motion

applicable

under
15

Rule

standard

12(b)(6)

for

alter

challenges

ego

a

1

complaint's compliance with the federal pleading requirements.

2

Under Rule 8(a)(2), a pleading must contain a “short and plain

3

statement of the claim showing that the pleader is entitled to

4

relief.” The complaint must give the defendant “‘fair notice of

5

what the ... claim is and the grounds upon which it rests.’” Bell

6

Atlantic v. Twombly, 550 U.S. 544, 555 (2007), quoting Conley v.

7

Gibson, 355 U.S. 41, 47 (1957).

8

To meet this requirement, the complaint must be supported by

9

factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129

10

S.Ct. 1937 (2009). Moreover, this court “must accept as true all

11

of the factual allegations contained in the complaint.” Erickson

12

v. Pardus, 551 U.S. 89, 94 (2007).7

13

“While legal conclusions can provide the framework of a

14

complaint,” neither legal conclusions nor conclusory statements are

15

themselves sufficient, and such statements are not entitled to a

16

presumption of truth. Iqbal, 556 U.S. at 678. Iqbal and Twombly

17

therefore prescribe a two-step process for evaluation of motions

18

to dismiss. The court first identifies the non-conclusory factual

19

allegations, and then determines whether these allegations, taken

20

as true and construed in the light most favorable to the plaintiff,

21

“plausibly give rise to an entitlement to relief.” Iqbal, 556 U.S.

22
23
24
25
26

7

Citing Twombly, 556 U.S. at 555-56, Neitzke v. Williams, 490
U.S. 319, 327 (1989) (“[w]hat Rule 12(b)(6) does not countenance
are dismissals based on a judge’s disbelief of a complaint’s
factual allegations”), and Scheuer v. Rhodes, 416 U.S. 232, 236
(1974) (“it may appear on the face of the pleadings that a recovery
is very remote and unlikely but that is not the test” under
Rule 12(b)(6)).
16

1

at 664.

2

“Plausibility,” as it is used in Twombly and Iqbal, does not

3

refer to the likelihood that a pleader will succeed in proving the

4

allegations. Instead, it refers to whether the non-conclusory

5

factual allegations, when assumed to be true, “allow[ ] the court

6

to draw the reasonable inference that the defendant is liable for

7

the misconduct alleged.” Iqbal, 556 U.S. at 663, 129 S. Ct. at

8

1949. “The plausibility standard is not akin to a ‘probability

9

requirement,’ but it asks for more than a sheer possibility that

10

a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S.

11

at 557).8 A complaint may fail to show a right to relief either by

12

lacking a cognizable legal theory or by lacking sufficient facts

13

alleged under a cognizable legal theory. Balistreri v. Pacifica

14

Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

15

B. Analysis

16
17
18
19
20
21
22
23
24
25
26

8

Twombly imposed an apparently-new “plausibility” gloss on
the previously well-known Rule 8(a) standard, and retired the
long-established “no set of facts” standard of Conley v. Gibson,
355 U.S. 41 (1957), although it did not overrule that case
outright. See Moss v. U.S. Secret Service, 572 F.3d 962, 968 (9th
Cir. 2009) (the Twombly Court “cautioned that it was not outright
overruling Conley ...,” although it was retiring the “no set of
facts” language from Conley). The Ninth Circuit has acknowledged
the difficulty of applying the resulting standard, given the
“perplexing” mix of standards the Supreme Court has applied in
recent cases. See Starr v. Baca, 652 F.3d 1202, 1215 (9th
Cir. 2011) (comparing the Court's application of the “original,
more lenient version of Rule 8(a)” in Swierkiewicz v. Sorema N.A.,
534 U.S. 506 (2002) and Erickson v. Pardus, 551 U.S. 89 (2007) (per
curiam), with the seemingly “higher pleading standard” in Dura
Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), Twombly and
Iqbal), rehearing en banc denied, 659 F.3d 850 (October 5, 2011).
See also Cook v. Brewer, 637 F.3d 1002, 1004 (9th Cir. 2011)
(applying the “no set of facts” standard to a Section 1983 case).
17

1

1.

2

against Metals USA under a theory of successor liability?

3

Metals USA moves to dismiss the FAC under Rule 12(b)(6),

4

arguing that it cannot be held liable under a theory of successor

5

liability.

6

Have

When

the

Plaintiffs

court

pleaded

sits

in

sufficient

diversity,

it

facts

must

to

proceed

apply

the

7

substantive law of the forum in which it is located. Erie R.R. Co.

8

v. Tompkins, 304 U.S. 64, 78 (1938). California substantive law

9

governs the issue of successor liability for the purposes of this

10

motion, and both plaintiffs and Metals USA have briefed the issue

11

with reference to California law.

12

a. What is the legal standard for successor liability?

13

Under California’s rule of successor liability, a corporation

14

purchasing the principal assets of another corporation does not

15

assume the predecessor corporation’s liabilities unless one of the

16

following exceptions applies:

17

(1) there is an express or implied agreement of assumption;

18

(2) the transaction amounts to a consolidation or merger of

19

the two corporations;

20
21

(3) the purchasing corporation is a mere continuation of the
seller;

22

(4) the transfer of assets to the purchaser is for the

23

fraudulent purpose of escaping liability for the seller's debts;

24

or

25
26

(5) the seller, had it remained a going concern, would have
been liable under the doctrine of strict products liability.
18

1

Ray v. Alad Corp., 19 Cal.3d 22, 28, 34 (1977).9

2

The question of whether to impose successor liability involves

3

“broad equitable considerations.” Rosales v. Thermex-Thermatron,

4

Inc., 67 Cal.App.4th 187, 196 (1998) (internal citations omitted).

5

The question whether it is fair to impose successor liability is

6

exclusively for the trial court. Id.

7

Plaintiffs argue for the imposition of successor liability

8

under the fourth Ray exception: that Dura-Loc fraudulently conveyed

9

assets to Metals USA in order to avoid liability for the failing

10

Tiles.

11

At this juncture, one point of law must be clarified. The line

12

of cases culminating in Ray, 19 Cal.3d at 22, and its progeny

13

articulate

14

successor liability. This body of law is distinct from California’s

15

codification of the Uniform Fraudulent Transfer Act (“UFTA”) at

16

California Civil Code sections 3439-3439.12. While both address

17

fraudulent transfers of assets, the Ray doctrine merely allows

18

courts to determine successor liability based on such a transfer.

19

The UFTA is far more comprehensive, providing as it does an

20

independent cause of action for fraudulent transfer, and remedies

21

such as the attachment of assets or injunctive relief against

an

equitable,

common-law

theory

for

establishing

22
9

23
24
25
26

While Ray is a products liability case, California courts
apply the same rule in assessing successor liability in non-tort
cases. See, e.g., McClellan v. Northridge Park Townhome Owners
Ass'n, Inc., 89 Cal.App.4th 746 (2001) (applying Ray to hold that,
where plaintiff contractor had obtained judgment against homeowners
association for amount due under contract, successor homeowners
association was merely a continuation of predecessor, and could
therefore be added as judgment debtor).
19

1
2

disposition of assets. Cal. Civ. Code § 3439.07(a).
As such, both parties’ attempts to import UFTA principles into

3

their

arguments

are

unavailing.

Plaintiffs

argue

in

their

4

opposition that they have pleaded facts satisfying the standards

5

for finding a fraudulent transfer under Cal. Civ. Code section

6

3439.04. (Plaintiff’s Opp., Docket no. 23, at 7-13.) Metals USA

7

disputes this claim, but then goes on to argue that, if UFTA

8

principles are to apply in determining successor liability, so too

9

must the UFTA’s statute of limitations, which would bar plaintiffs’

10

claims against them. (Metals USA Reply, Docket no. 25, at 6-7.)

11

Metals USA also argues that the UFTA’s protections for good faith

12

transferees who take assets for value, Cal. Civ. Code § 3439.08,

13

exempt it from liability. (Metals USA Reply, Docket no. 25, at 6.)

14

Neither side is correct. Research has failed to unearth a

15

single federal or California case that applies section 3439.04 to

16

assess whether a fraudulent transfer occurred under Ray. See also

17

Kim v. Interfirst Capital Corp., No. G030719, 2003 WL 21214268 at

18

*3 (Cal.Ct.App. May 27, 2003) (finding no authority for applying

19

section 3439.04 to the question of successor liability due to

20

fraudulent transfer).10 The court therefore also declines to import

21

the UFTA’s statute of limitations and its protections for good

22

faith transferees into the successor liability inquiry.

23
10

24
25
26

While the court is not bound by unpublished state
decisions, it may consider them in its decision-making. See, e.g.,
Roe ex rel Callahan v. Gustine Unified School Dist. 678 F.Supp.2d
1008, 1042-43 (E.D.Cal. 2009) (Wanger, J.) (citing two unpublished
California appellate decisions – and several published opinions –
in support of the court’s interpretation of a California statute).
20

1

The court will turn to common-law principles in deciding

2

whether plaintiffs have properly pleaded a case for successor

3

liability.

4

b. Can Metals USA be held liable under plaintiffs’

5

theory of successor liability?

6

The

fact

pattern

presented

in

Plaintiffs’

complaint

is

7

admittedly unique. In nearly every case finding successor liability

8

due to a fraudulent transfer, the successor entity is tied to the

9

fraud in some way. See, e.g., Bradford v. Winter, No. B216235, 2010

10

WL 3260011 (Cal.Ct.App. 2010) (predecessor and successor entities

11

had common shareholders); Schultz v. Bradshaw, No. D057471, 2011

12

WL 1991662 (Cal.Ct.App. 2011) (predecessor and successor entities

13

had same principal shareholder); Phillips, Spallas & Angstadt, LLP

14

v. Fotouhi, 197 Cal.App.4th 1132 (2011) (predecessor and successor

15

law firms both employed the attorney who perpetrated fraud).

16

By

17

participated

18

plaintiffs allege:

19

1.

contrast,

plaintiffs

in

the

do

alleged

not

allege

fraudulent

that

Metals

transfer.

USA

Instead,

“Plaintiffs are informed and believe...that in or around

20

2005, Dura-Loc became acutely aware that the inherent

21

defect

22

Dura-Loc received an unusually large amount of warranty

23

claims to repair or replace its consumers’ Tiles and

24

received numerous complaints regarding the separation of

25

the

26

appearance of the Tiles.” (FAC ¶ 39.)

was

beginning

granules

from

to

the

21

manifest

Tiles

on

and

the

the

Tiles

as

discolored

1

2.

“Plaintiffs are informed and believe...that in 2005

2

Dura-Loc's sales for the Tiles were approximately $11.3

3

million.” (FAC ¶ 40.)

4

3.

“Despite the fact that Dura-Loc had more than doubled

5

its amount of sales from 1997 to 2005, in or around May

6

2006, Dura-Loc sold all of its assets to Defendant

7

Metals USA for $9.4 million - nearly two million dollars

8

($2,000,000.00)

9

previous fiscal year.” (FAC ¶ 41.)

10

4.

less

than

its

total

sales

for

the

“Under the purchase agreement, Plaintiffs are informed

11

and

12

expressly assume any of the warranty obligations or

13

liabilities of Dura-Loc.” (FAC ¶ 41.)

14

5.

believe...that

Defendant

Metals

USA

did

not

“Plaintiffs are informed and believe...that Dura-Loc and

15

Defendant

Metals

USA

entered

with

the

intent

16

transaction

17

liability and warranty obligations for the Tiles which

18

is evidenced by, among others: (i) the substantial

19

number of warranty claims and owner complaints that were

20

received by Dura-Loc with respect to the Tiles in the

21

years preceding the purchase by Metals USA; (ii) that

22

Dura-Loc sold all of its assets to Metals USA for nearly

23

two million dollars ($2,000,000.00) less than its total

24

sales for the previous fiscal year; and (iii) that

25

Defendant Metals USA reported in its FORM 10-Q for the

26

quarterly

period

ended
22

August

into
to

this

escape

15,

2011,

purchase
Dura-Loc's

that

its

1

Building

2

approximately

3

settlement with the previous owners of the Dura-Loc...to

4

cover pre-acquisition warranty claims.’” (FAC ¶ 43.)

5

6.

Products
$0.7

group

‘recorded

[$700,000.00]

a

resulting

gain
from

of
a

“ After its sale to Defendant Metals USA[], Dura-Loc

6

ceased its manufacturing, marketing, and selling of the

7

Tiles, and changed its name to 604471 Ontario, Inc.”

8

(FAC ¶ 44.)

9

In short, plaintiffs allege that as warranty claims mounted, Dura-

10

Loc sought to escape liability by selling its assets to Metals USA

11

for a below-market price and ceasing operations. Later, Dura-Loc

12

paid Metals USA $700,000.00 to cover pre-acquisition warranty

13

claims.

14

One California case presents facts analogous to the present

15

matter. In Kim, 2003 WL 21214268 at *1, the plaintiffs alleged that

16

they were sold “unsuitable stock” by Gallagher & Co., a brokerage

17

firm. Interfirst Capital Corp. later purchased Gallagher’s assets.

18

The plaintiffs eventually sued Interfirst on a theory of successor

19

liability. Their complaint alleged significant fraud by Gallagher,

20

but none by Interfirst. Instead, plaintiffs alleged that Interfirst

21

purchased Gallagher for significantly below market value. The trial

22

court allowed the matter to proceed on the issue of “whether the

23

purchase price in any way evidenced a fraudulent intent on the part

24

of the purchaser.” Id. After a bench trial, the court found that

25

Interfirst’s purchase was for adequate consideration, relieving it

26

of successor liability.
23

1

Given Kim, it appears that California law will support a

2

theory of successor liability due to fraudulent transfer, even

3

where

4

consideration.

5

allegations

of

Determinations

of

fraud

are

successor

based

solely

liability

are

on

inadequate

highly

fact-

6

specific, and it would be inappropriate for the court to rule on

7

the substantive merits of plaintiffs’ case for successor liability

8

at the pleadings stage. “Each successor liability ‘case must be

9

determined on its own facts’ including looking at the ‘totality of

10

the unusual circumstances.’” See CenterPoint Energy, Inc. v.

11

Superior Court, 157 Cal.App.4th 1101, 1115 (quoting Rego v. ARC

12

Water Treatment Co. of Pa., 181 F.3d 396, 403 (3d Cir. 1999)).

13

Nevertheless, plaintiffs must still meet the pleading standards set

14

forth in the Federal Rules of Civil Procedure. And it is here that

15

plaintiffs come up short.

16

c.

17

support their theory of successor liability?

18

Have

plaintiffs

pleaded

adequate

facts

to

Metals USA argues that plaintiffs have failed to plead its

19

involvement

in

the

alleged

required

under

fraudulent

20

particularity

21

alleging fraud or mistake, a party must state with particularity

22

the circumstances constituting fraud or mistake. Malice, intent,

23

knowledge, and other conditions of a person’s mind may be alleged

24

generally.” “Particularity” means that the allegations specify

25

facts such as “times, dates, places, benefits received, and other

26

details of the alleged fraudulent activity.” Neubronner v. Milken,

Rule

24

9(b),

transfer
which

with

provides:

the
“In

1

6 F.3d 666, 672 (9th Cir. 1993).

2

Plaintiffs counter that, as they have alleged no fraud on

3

Metals USA’s part, they need not plead its fraudulent conduct with

4

particularity.

5

The court is inclined to agree with plaintiffs. As stated in

6

Charles Alan Wright & Arthur R. Miller, Federal Practice and

7

Procedure § 1297 (3d ed. 2012):

8
9
10
11
12
13

[T]he pleading of the circumstances of the alleged fraud
with a certain amount of precision...serves
the federal rule's purpose by apprising [the defendant]
of the nature of the claim and the acts or statements or
failures...constituting the fraud being charged against
[the defendant]....
[T]he reasons for the particularity rule are not present
when the fraud alleged is that of someone who is not a
party to the action, and it has been held that in such
a case the circumstances of the fraud or mistake need
not be pleaded by the plaintiff with any special degree
of particularity.

14
15

Two recent unpublished opinions of district courts in the Ninth

16

Circuit echo this view.

17

In Pacific Rollforming, LLC v. Trakloc Int'l, LLC, No. CV

18

07–1897, 2008 WL 4183916 (S.D.Cal. Sept. 8, 2008) (Lorenz, J.),

19

plaintiff sought to assert liability over successor entities for

20

fraud allegedly perpetrated by a predecessor-in-interest. The

21

successors moved to dismiss for plaintiff’s failure to allege their

22

liability with particularity under Rule 9(b). The court refused to

23

so, finding that Rule 8(a)(2) governed pleading of the successor-

24

in-interest allegations.

25

In Monaco v. Bear Stearns Companies, Inc., No. CV 09–05438,

26

2011 WL 4059801 (C.D.Cal. Sept. 12, 2011) (Otero, J.), plaintiffs
25

1

claimed that defendant JPMorgan Chase & Co. (“JPMorgan”) was liable

2

under

3

predecessor-in-interest. JPMorgan moved to dismiss, arguing that

4

plaintiffs had failed to plead sufficient facts to support a theory

5

of successor liability. The court quoted Pacific Rollforming, 2008

6

WL 4183916 at *3, approvingly for the proposition that “the liberal

7

requirements

8

allegations concerning [d]efendants,” and denied JPMorgan’s motion.

9

Monaco, 2011 WL 4059801 at *19.

a

successor

of

theory

Rule

for

8(a)(2)

fraudulent

apply

omissions

by

its

to...successor-in-interest

10

But there remains the question of whether plaintiffs have met

11

Iqbal’s pleading requirements with respect to Dura-Loc’s alleged

12

fraud. The court finds that it did not.

13

Plaintiffs plead several critical facts on information and

14

belief without providing any factual basis for their belief: first,

15

that Dura-Loc because aware of its mounting liabilities around 2005

16

(FAC ¶ 39); second, that Dura-Loc's sales for the Tiles were

17

approximately $11.3 million (FAC ¶ 40); and third, that Defendant

18

Metals USA did not expressly assume any of the warranty obligations

19

or liabilities of Dura-Loc (FAC ¶ 41). Plaintiffs have failed to

20

state any factual basis for their belief in these allegations.

21

Under Rule 9(b), plaintiffs are permitted to plead allegations

22

of fraud on information and belief, but must still state the

23

factual basis for their belief. Neubronner, 6 F.3d at 672. While

24

the court, per Wright & Miller, recognizes that Dura-Loc is not a

25

party to this action and therefore need not be “appris[ed] of the

26

nature of the claim and [its] acts or statements or failures,”
26

1

Federal Practice and Procedure at § 1297, the absence of any facts

2

supporting plaintiffs’ beliefs means that their allegations are

3

closer

4

“probability.” See Iqbal, 556 U.S. at 663. Simply put, the court

5

has no way of knowing whether the allegations in question are

6

derived from some source, no matter how remote, or conceived of to

7

support plaintiffs’ claims. As such, the complaint lacks sufficient

8

well-pleaded

9

successor liability. Balistreri, 901 F.2d at 699.

to

the

realm

facts

to

of

“possibility”

allege

a

than

cognizable

the

legal

realm

theory

of

for

10

The court accordingly finds that plaintiffs have failed to

11

state a claim for successor liability against defendant Metals USA,

12

and will grant Metals USA’s motion to dismiss.

13

That said, this appears to be an instance in which discovery

14

into the relevant facts is merited. Under Rule 26(b)(1), “For good

15

cause, the court may order discovery of any matter relevant to the

16

subject matter involved in the action....” Further, under Rule

17

26(d)(1), the court has the power to authorize such discovery

18

before the mandatory Rule 26(f) conference. Good cause lies in this

19

instance because plaintiffs have pleaded facts – an apparently-low

20

purchase price, Dura-Loc’s $700,000 payment to settle warranty

21

claims – that raise concerns about fraudulent transfer, but all of

22

the relevant evidence is in defendant Metals USA’s possession.

23

As stated in Jones v. AIG Risk Management, Inc. 726 F.Supp.2d

24

1049, 1055-56 (N.D.Cal. 2010) (Chen, J.) (cited with approval for

25

this point in Arthur R. Miller, From Conley to Twombly to Iqbal:

26

A Double Play on the Federal Rules of Civil Procedure, 60 Duke L.J.
27

1
2
3
4
5
6
7
8
9
10

1, 107 n.411 (2010)):
The Court has the ability to permit such discovery even
in the face of dismissal for failure to satisfy Iqbal
and Twombly where, as here, relevant evidence is solely
within the province of Defendants, leaving open the
possibility of further amendment. Cf. Santiago v. Walls,
599 F.3d 749, 758-59 (7th Cir.2010) (improper to discuss
complaint where lack of specificity is due to facts
plaintiff cannot know for certain without discovery);
Arocho v. Nafziger, 367 Fed.Appx. 942, 954-55 (10th
Cir.2010) (where facts known only by defendants,
plaintiff should be afforded opportunity to amend
pleadings); Morgan v. Hubert, 335 Fed.Appx. 466, 472
(5th Cir.2009) (plaintiff cannot be requested to plead
facts peculiarly within the knowledge of defendants);
Tompkins v. LaSalle Bank Corp., 2009 WL 4349532
(N.D.Ill. Nov. 24, 2009) (plaintiff should be afforded
opportunity to conduct discovery into liability of
parent corporation before summary judgment).

11
12

Therefore, the court will allow plaintiffs to conduct limited,

13

reasonable, tailored discovery into the course of dealings between

14

Metals USA (and any subsidiary), on the one hand, and Dura-Loc and

15

604471 Ontario, on the other, in support of its allegations of

16

successor liability. Plaintiffs’ discovery requests may be directed

17

solely to Metals USA.

18

IV. CONCLUSION

19

The court hereby orders as follows:

20

[1] As to Defendant R. Allan Reid’s motion to dismiss

21

plaintiffs’

22

defendant Reid SHALL PROVIDE further briefing on the

23

following questions:

First

Amended

Complaint,

plaintiffs

and

24

[a] Can the court exercise personal jurisdiction

25

over an individual shareholder and officer of a

26

corporation

under
28

an

alter

ego

theory

if

the

1

corporation itself is not a party to the action?

2

[b] If the corporation is a necessary party, may

3

Dura-Loc’s actions be imputed to 604471 Ontario for

4

purposes of the exercise of personal jurisdiction?

5

Plaintiffs’ brief is due within fourteen (14) days of

6

the effective date of this order. Defendant Reid’s

7

brief, if any, is due within twenty-eight (28) days of

8

the effective date of this order. The parties’ briefs

9

are to be no longer than ten (10) pages each.

10

[2] Defendant Metals USA, Inc.’s motion to dismiss

11

plaintiffs’ First Amended Complaint for failure to state

12

a claim is GRANTED without prejudice.

13

[3] Plaintiffs are granted leave to conduct discovery

14

under the terms outlined above, to be supervised by the

15

Magistrate

16

complaint no later than ninety (90) days after entry of

17

this order, but only if discovery provides a basis for

18

well-pleaded allegations of successor liability against

19

Metals USA.

Judge.

20

IT IS SO ORDERED.

21

DATED:

Plaintiffs

October 12, 2012.

22
23
24
25
26
29

must

file

any

amended