MyECheck, Inc. v. Seven Miles Securities et al

Filing 30

ORDER signed by Judge Kimberly J. Mueller on 10/16/2015 ORDERING that the 19 Motion to Dismiss is GRANTED with prejudice and without leave to amend. (Zignago, K.)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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MYECHECK, INC.,

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Plaintiff,

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No. 2:14-cv-02889-KJM-AC

v.

ORDER

SWEETSUN INTERTRADE, INC., et al.,

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Defendants.

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This matter is before the court on defendant Scottsdale Capital Advisors’ motion

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to dismiss. ECF No. 19. The other defendants, Sweetsun Intertrade, Inc., Seven Miles Securities,

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and Titan International Securities, Inc., have not yet appeared. MyECheck (MYEC) filed an

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opposition and requested leave to amend. ECF No. 22. The court held a hearing on this matter

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on July 24, 2015, at which Brian Katz appeared for MYEC and Alan Baskin for Scottsdale. For

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the following reasons, the motion to dismiss is GRANTED with prejudice and without leave to

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amend.

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I.

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BACKGROUND
For purposes of this motion, the court assumes the following allegations are true.

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See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In 2012, Sweetsun told MYEC it had purchased

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a $32,200 promissory note from Tangiers Investors, L.P., entitling it to MYEC shares. Compl.
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¶¶ 10−12, ECF No. 1. Sweetsun had never actually purchased a promissory note and had no right

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to the shares. Id. ¶ 16. Oblivious to the fraud, MYEC issued shares to Sweetsun and Titan, as

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directed by Sweetsun. Id. ¶¶ 13−14. MYEC believes the shares issued to Titan were sent to

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Scottsdale. Id. ¶ 14. Sweetsun also induced MYEC’s transfer agent to issue additional shares in

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MYEC, none of which were authorized, including shares sent to Seven Mile and Sweetsun.

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Id. ¶ 17.

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MYEC discovered the fraud in October 2013. Id. ¶ 18. On about November 13,

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2013, MYEC contacted Scottsdale and requested it freeze trading in the fraudulent shares. Id.

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¶ 23. Scottsdale froze the shares temporarily, but on January 16, 2014, it emailed MYEC to say it

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could not continue a freeze without a temporary restraining order. Id. ¶ 24. The remaining

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560,005,000 shares, held by Seven Miles, Titan, and an unknown entity are currently worth about

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$16 million. Id. ¶¶ 28–29. MYEC seeks to enjoin the defendants, including Scottsdale, from

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transferring these remaining shares. Id. at 10.

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MYEC filed its complaint in December 2014. Id. at 11. Approximately five

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months later, no other party had appeared, and the court issued an order for MYEC to show cause

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why its complaint should not be dismissed for failure to prosecute. ECF No. 7. MYEC

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responded and reported it had completed service on Seven Miles and Scottsdale, but the other

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defendants’ foreign status made service difficult. ECF No. 12 (citing Article 2 of the Hague

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Convention).1

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Scottsdale filed the pending motion to dismiss on June 1, 2015. ECF No. 19. It

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asserts it is merely a broker-dealer that clears and sells restricted stock, ensuring the stock meets

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certain federal conditions for sale. Id. at 3. It denies ever owning any of the relevant MYEC

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stock, but agrees it held the certificates for purposes of obtaining confirmation that the shares

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were marketable. Id. at 4. Scottsdale acknowledges MYEC’s request to freeze the shares in

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November 2013, but asserts MYEC made no specific allegation of fraud; rather MYEC only

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indicated the shares were issued “in error.” Id. at 4−5. Scottsdale also points out that MYEC

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The order to show cause is hereby discharged.
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never pursued a temporary restraining order and filed this action almost a year after its earlier

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correspondence. Id. at 6.

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In light of these assertions, Scottsdale argues MYEC lacks standing. Id. at 7–13.

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Additionally, Scottsdale argues MYEC is barred by laches because its allegations show MYEC’s

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efforts - or absence thereof - lacked diligence and caused prejudice to Scottsdale. See id. at 13–15

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(citing Apache Survival Coal v. United States, 21 F.3d 895, 905 (9th Cir. 1994)). Finally,

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Scottsdale argues MYEC’s claims must be dismissed for failure to join indispensable parties

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under Federal Rule of Civil Procedure 19(a)(1), because MYEC did not join the current MYEC

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shareholders, who now own the MYEC shares at issue. Id. at 15.

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MYEC addresses none of these arguments in its opposition, but requests leave to

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amend its complaint to include new allegations against Scottsdale under section 8-115 of the

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Uniform Commercial Code. Opp’n 4–6 (citing U.C.C. § 8-115(2)). That section allows for the

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liability of a “securities intermediary” or “broker” who “acted in collusion with the wrongdoer in

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violating the rights of the adverse claimant.” Id. MYEC has not attached a proposed amended

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complaint to its opposition; it does describe discrepancies in the documents Scottsdale relied on

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when it lifted the freeze on MYEC shares. See id. at 5.

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II.

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DISCUSSION
A.

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Motion to Dismiss
MYEC opposes Scottsdale’s motion, but contests none of Scottsdale’s factual

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assertions and omits any argument against dismissal other than to request leave to amend. By

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ignoring these arguments, MYEC tacitly concedes dismissal of its claims is appropriate. See

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Walsh v. Nev. Dep’t of Human Res., 471 F.3d 1033, 1037 (9th Cir. 2006); Silva v. U.S. Bancorp,

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No. 10-01854, 2011 WL 7096576, at *2–3 (C.D. Cal 2011) (citing Tatum v. Schwartz, No.

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08−16987, 2007 WL 419463, *3 (E.D. Cal. 2007)). At hearing, MYEC agreed Scottsdale’s

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motion should be granted with prejudice and without leave to amend as to the claims originally

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pleaded.

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B.

Leave to Amend
As noted above, MYEC requests leave to amend. Federal Rule of Civil Procedure

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15(a)(2) provides: “The court should freely give [leave to amend] when justice so requires,” and

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the Ninth Circuit has “stressed Rule 15’s policy of favoring amendments.” Ascon Props., Inc. v.

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Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989.) “In exercising its discretion [regarding

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granting or denying leave to amend] ‘a court must be guided by the underlying purpose of Rule

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15―to facilitate decision on the merits rather than on the pleadings or technicalities.’” DCD

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Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987) (quoting United States v. Webb,

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655 F.2d 977, 979 (9th Cir. 1981)). However, “the liberality in granting leave to amend is subject

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to several limitations. Leave need not be granted where the amendment of the complaint would

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cause the opposing party undue prejudice, is sought in bad faith, constitutes an exercise in futility,

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or creates undue delay.” Ascon Props., 866 F.2d at 1160 (internal citations omitted). Not all the

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factors merit equal weight; prejudice to the opposing party carries the greatest weight. Eminence

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Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).

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Here, Scottsdale argues MYEC’s request was procedurally deficient, unduly
delayed, and should be denied because amendment would be futile.

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1.

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This district’s Local Rules provide: “If filing a document requires leave of court,

Procedural Impropriety

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such as an amended complaint after the time to amend as a matter of course has expired, counsel

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shall attach the document proposed to be filed as an exhibit to moving papers seeking such leave

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and lodge a proposed order as required by these Rules.” E.D. Cal. L.R. 137(c). All motions must

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also be noticed on this court’s civil law and motion calendar, id. R. 230(b), unless filed as an ex

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parte application, and then must comply with this court’s standing order, ECF No. 3-1. MYEC

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did not attach a proposed amended complaint to its opposition, did not file a motion or notice of

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hearing, and did not comply with the standing order’s provisions on ex parte requests. These

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shortfalls make adjudication of the parties’ dispute more difficult and less efficient, but do not

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alone warrant a denial of MYEC’s request. Counsel is cautioned against future violations of the

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court’s orders and the Local Rules.
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MYEC’s timing in seeking amendment is questionable. In response to MYEC’s

Delay

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request for leave to amend, Scottsdale filed copies of email correspondence sent to MYEC’s

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counsel five months before Scottsdale moved to dismiss. See Cruz Decl. ¶¶ 2–3 & Ex. 1, ECF

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No. 24-1. To these emails Scottsdale attached the evidence it relied on when it decided to revoke

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the freeze on MYEC shares, see id., the same documents MYEC cites to support its request for

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leave to amend, see Opp’n at 5. These documents include a July 31, 2013 letter from Thomas

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Russell, who purported to be “counsel to MYECHECK, Inc.” Cruz Decl. Ex. 1, at 16–19,2 ECF

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No. 24-1. Mr. Russell gave his opinion that the $32,200 note, discussed above, was a binding

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obligation to MYEC, was duly assigned by Tangiers to Sweetsun, and entitled Sweetsun to 300

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million MYEC shares. Id. at 19. The documents also included a copy of a letter from the “Law

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Office of Thomas Russell” addressed “To whom it may concerned [sic],” enclosing a check for

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$9,100. Id. at 12–13. The letter included a copy of the enclosed check, which was addressed to

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“Tangiers Investors LPC,” was paid from Mr. Russell’s “Client Trust Account,” and included the

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note, “Sweetsun Intertrade Inc. MyECheck Client Distr. Assignments 9/10/12 4/30/13 7/26/13.”

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Id. at 13.

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MYEC’s counsel acknowledged receipt of the email and attachments on February

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6, 2015, and said he would discuss them with his client. See Cruz Decl. ¶ 4 & Ex. 2. But counsel

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did not request leave to amend the complaint until opposing Scottsdale’s motion to dismiss on

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July 10, 2015. This delay, although substantial, is not so prejudicial as to warrant denial of

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MYEC’s request. Discovery has not yet commenced, no trial has been set, and the proposed new

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claim would not substantially alter the nature of MYEC’s complaint. Cf. Morongo Band of

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Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990); DCD Programs, 833 F.2d at

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187−88.

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Pages cited in this document are those printed at the top of each page by the CM/ECF

system.
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3.

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If allowed leave to amend, MYEC explains it would assert a claim “against

Futility

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Scottsdale pursuant to U.C.C. § 8-115(2).” Opp’n at 6 (capitalization altered). California has

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adopted section 8-115 of the Uniform Commercial Code and its comments. See Cal. Com. Code

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§ 8115. That section provides, in relevant part,

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A securities intermediary that has transferred a financial asset
pursuant to an effective entitlement order, or a broker or other agent
or bailee that has dealt with a financial asset at the direction of its
customer or principal, is not liable to a person having an adverse
claim to the financial asset, unless the securities intermediary, or
broker or other agent or bailee . . . [a]cted in collusion with the
wrongdoer in violating the rights of the adverse claimant. . . .

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Id. The parties agree, at least for purposes of this motion, that section 8115 applies to Scottsdale

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in general. See Opp’n at 4–6; Reply at 6–7.

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“As a general proposition, section 8115 immunizes brokers from liability in

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connection with their activities as conduits for the transfer of securities on behalf of their

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customers.” Decker v. Yorkton Sec., Inc., 106 Cal. App. 4th 1315, 1320–21 (2003); see also Cal

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Com. Code § 8115 cmt. 2. Under section 8115, “a broker will not be liable even if it ‘has notice

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that someone asserts a claim to a customer’s securities or security entitlements,’ because ‘the firm

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should not be placed in the position of having to make a legal judgment about the validity of the

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claim at the risk of liability either to its customer or to the third party for guessing wrong.’” Id.

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at 1321 (quoting Cal. Com. Code § 8115 cmt. 3). In other words, a defendant intermediary or

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broker “is privileged to act on the instructions of its customer or entitlement holder, unless it has

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been served with a restraining order or other legal process enjoining it from doing so,” Cal. Com.

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Code § 8115 cmt. 3, because “[i]t is not the role of the record-keeper to police whether the

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transactions recorded are appropriate,” id. cmt. 5. The broker’s knowledge of an adverse claim

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“is a necessary but not sufficient condition of the collusion test.” Id.

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Paragraph 2 of section 8115 is meant to carve out “egregious cases,” in which

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defendants’ actions “go[] beyond the ordinary standards of the business of implementing and

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recording transactions, and reach[] a level of affirmative misconduct in assisting the customer in

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the commission of a wrong.” Id. Another federal district court, interpreting the identically
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worded provisions of Michigan law on a motion to dismiss, found that paragraph 2 does not apply

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if the defendant allegedly ignored red flags but took no affirmative steps. See H & R Block Fin.

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Advisors, Inc. v. Express Scripts, Inc., 426 F. Supp. 2d 656, 661–63 (E.D. Mich. 2006)

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(interpreting Mich. Compl. L. § 440.8115). To find otherwise, in that court’s opinion, would

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“turn a negative into a positive.” Id. at 663. Later, on summary judgment, upon revelation that

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the defendant had not only ignored red flags but had “pressur[ed] a 78-year-old woman to sell

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stock that she insisted did not belong to her,” the same court found section 8-115 could not

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preclude liability. H&R Block, No. 05-73306, 2006 WL 2125226, at *6 (E.D. Mich. July 27,

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2006); see also Pine Belt Enterprises, Inc. v. SC & E Admin. Servs., Inc., No. 04-105, 2005 WL

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2469672, at *7 (D.N.J. Oct. 6, 2005) (finding broker was not liable under analogous New Jersey

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provision despite plaintiffs’ allegations that defendant “conducted no due diligence before

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transferring funds from the Account”); but see Davis v. Sterne, Agee & Leach, Inc., 965 So. 2d

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1076, 1086 (Ala. 2007) (finding U.C.C. section 8-115 does not protect a defendant who

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transferred a financial asset in reliance on a forged document; citing Watson v. Sears, 766 N.E.2d

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784 (Ind. Ct. App. 2002) and Powers v. Am. Express Fin. Advisors, Inc., 82 F. Supp. 2d 448 (D.

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Md. 2000), aff’d, 238 F.3d 414 (4th Cir. 2000)).

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Here, MYEC cites three aspects of Sweetsun’s paperwork to argue Scottsdale

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faces liability under section 8115(2): (1) the number of shares approved in MYEC corporate

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resolutions are not the same as the number of shares MYEC told Scottsdale were fraudulently

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issued; (2) the checks to Sweetsun postdated its reported purchase by many months and were

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issued from Sweetsun’s attorney’s trust account rather than Sweetsun’s own account; (3) some of

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the documents bear what appear to be electronic signatures rather than signatures applied by

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hand. MYEC also points out that it told Scottsdale the shares were issued in error and later

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clarified that the shares were issued fraudulently.

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Assuming these allegations are true, and construing the cited documents in the

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light most favorable to MYEC, it can at most be said that Scottsdale ignored red flags and

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overlooked suspicious circumstances, but undertook no affirmative misdeed. MYEC makes out a

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possible case of collusion, but not a plausible case. See Iqbal, 556 U.S. at 679 (“[W]here the
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well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct,

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the complaint has alleged—but it has not ‘show[n]’—‘that the pleader is entitled to relief.’”

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(quoting Fed. Rule Civ. Proc. 8(a)(2)). MYEC does not describe why or how these discrepancies

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confirmed the alleged fraud, let alone explain why the documents are evidence Scottsdale

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colluded with the other defendants.

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MYEC protests that it told Scottsdale the shares were issued fraudulently and

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argues this is sufficient evidence of collusion. As noted above, Scottsdale’s knowledge of an

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adverse claim “is a necessary but not sufficient condition of the collusion test.” Cal. Com. Code

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§ 8115, cmt. 5. Section 8115 and its comments repeatedly paraphrase the same rule: a securities

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intermediary or broker need not make legal judgments or police its customer’s claims and is

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privileged to act on the instruction of one customer, even if it is aware of another’s competing

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claim.

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Lastly, MYEC advances no argument to oppose Scottsdale’s laches defense, which

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would apply equally to the proposed amendment: despite a claimed fraud and Scottsdale’s advice

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to obtain a temporary restraining order, MYEC delayed filing a complaint or obtaining any court

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order and so exacerbated its damages. Amendment would be an exercise in futility.

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III.

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Scottsdale’s motion to dismiss, ECF No. 19, is GRANTED with prejudice and

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CONCLUSION

without leave to amend.
IT IS SO ORDERED.
DATED: October 16, 2015.

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UNITED STATES DISTRICT JUDGE

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