Rackwise, Inc. v. Archbold

Filing 13

MEMORANDUM and ORDER signed by Senior Judge William B. Shubb on 6/13/2017 GRANTING IN PART and DENYING IN PART 6 Plaintiff's Motion for Preliminary Injunction: Bond to be posted in the amount of $10,000. Plaintiff's remaining reques ts for mandatory injunctive relief are DENIED. IT IS FURTHER ORDERED that plaintiff shall file any motion to compel arbitration by 6/26/2017. Any opposition to such motion shall be filed by 7/10/2017. Any reply to such opposition shall be filed by 7/17/2017. Any hearing on such motion shall take place on 7/24/2017 at 01:30 PM in Courtroom 5 (WBS) before Senior Judge William B. Shubb. [See document for further details.] cc: Financial. (Kirksey Smith, K)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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RACKWISE, INC., a Nevada
Corporation,

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MEMORANDUM AND ORDER RE: MOTION
FOR PRELIMINARY PROHIBITORY AND
MANDATORY INJUNCTION

Plaintiff,

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CIV. NO. 2:17-797 WBS CKD

v.
GUY ARCHBOLD, an individual,
Defendant.

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Plaintiff Rackwise, Inc. brought this action against

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defendant Guy A. Archbold for conversion, fraud, breach of the

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duty of good faith and fair dealing, tortious interference with

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prospective economic advantage, and declaratory relief arising

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from defendant’s actions before and after his purported

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termination as plaintiff’s President, CEO, and Chairman of the

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Board of Directors.

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preliminary prohibitory and mandatory injunctive relief.

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No. 6.)

Before the court is plaintiff’s Motion for

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(Docket

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I.

Factual and Procedural History

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In 2011, defendant became President, CEO, and Chairman

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of the Board of Rackwise.1

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No. 4).)

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allegedly entered into a Subscription Agreement that entitled it

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to appoint two members to Rackwise’s board of directors and

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created warrants that permitted RFII to purchase shares of

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Rackwise upon notice and payment.

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(“Subscription Agreement”) (Docket No. 7-3).)

(First Am. Compl. (“FAC”) ¶ 9 (Docket

On May 7, 2014, Rackwise Funding II, LLC (“RFII”)

(Id. ¶¶ 10-11; id., Ex. B
Defendant, as

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Rackwise CEO, also allegedly granted another company, Triple R-F,

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LLC, warrants to purchase shares of Rackwise stock.

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Suppl. Decl. ¶¶ 4-5, Exs. 2-3 (Docket Nos. 10-1, 10-3 to -4).)

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(Richert

On February 2, 2017, plaintiff alleges its board of

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directors consisted of Archbold, John Kyees, and Michael

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Feinberg.

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Patrick Imeson, as RFII’s Managing Member, allegedly appointed

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himself and Bart Richert to Rackwise’s Board of Directors

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pursuant to RFII’s Subscription Agreement.

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Decl. ¶¶ 10-12.)

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and Richert allegedly held a special board meeting and terminated

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Archbold as President, CEO, and chairman of the board.

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14.)

(Imeson Decl. ¶ 9 (Docket No. 6-3).)

(FAC ¶ 13; Imeson

On February 3, 2017, Feinberg, Kyees, Imeson,

On March 22, 2017, RFII and Triple R-F exercised their

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warrants to purchase shares of plaintiff’s stock.

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¶¶ 14, 16; Richert Supp. Decl. ¶¶ 9-10.)

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(FAC ¶

Archbold disputed the validity of this action.

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That day,

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(Imeson Decl.

The next day,

Rackwise previously merged with Visual Network Design,
Inc. (“VND”), which caused VND’s bylaws to become Rackwise’s
bylaws. (See FAC ¶ 7; id., Ex. A (“Rackwise Bylaws”) (Docket No.
7-2).)
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shareholders possessing over 79% of Rackwise’s outstanding stock

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voted by written consent to terminate Archbold as President, CEO,

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and chairman of the board.2

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(“Written Consent of Shareholders”) (Docket No. 7-6); Richert

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Suppl. Decl. ¶¶ 13-15.)

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(Imeson Decl. ¶¶ 20-23; FAC Ex. E

After his alleged termination, defendant continued to

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act as CEO, President, and chairman of Rackwise.

He allegedly

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held himself out as the CEO to Rackwise constituents and

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employees, held a meeting with other former Rackwise board

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members purporting to act on Rackwise’s behalf, filed documents

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with the SEC on Rackwise’s behalf,3 communicated with potential

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Rackwise investors using confidential and proprietary Rackwise

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information, and terminated a contract with a current client.

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(FAC ¶¶ 28-36; Imeson Decl. ¶¶ 26-28, 34-40, 44.)

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Plaintiff initiated this action against defendant,

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alleging conversion, fraud, breach of the duty of good faith and

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fair dealing, and tortious interference with prospective economic

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advantage.

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injunction preventing defendant from (1) accessing or logging

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into Rackwise’s account in the SEC’s online EDGAR filing system;

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(2) representing himself to anyone as being an officer, director,

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Plaintiff now moves for a preliminary prohibitory

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Imeson and Richert signed the written shareholder
consent. Imeson signed as the managing member of shareholders
RFII, Black Diamond Financial Group, LLC, Rackwise Funding, LLC,
and Black Diamond Holdings, LLC. (Imeson Decl. ¶¶ 2-3, 21.)
Richert signed as the managing member of shareholder Triple R-F.
(Id. ¶ 3; Richert Decl. ¶ 1.)
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Defendant also allegedly accessed and filed documents
using Rackwise’s online S.E.C. account after the February board
of directors action, but before the written shareholder action.
(See Imeson Decl. ¶ 42.)
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or employee of, or otherwise affiliated with, Rackwise; and (3)

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acting, attempting to act, or purporting to act on behalf of

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Rackwise.

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requiring defendant to submit a declaration attesting to (1) the

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identities of all Rackwise customers he has contacted since March

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22, 2017, purportedly on behalf of Rackwise with true and correct

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copies of all communications with those customers and (2) the

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identifies of all potential investors that Archbold has solicited

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or attempted to solicit investments or financial on behalf of

Plaintiff also moves for a mandatory injunction

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Rackwise, including copies of all communications.

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II.

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Discussion
State law “controls the issue of whether a plaintiff is

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entitled to seek injunctive relief on the claim.”

Anselmo v.

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Mull, Civ. No. 2:12-1422 WBS EFB, 2012 WL 5304799, at *6 (E.D.

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Cal. Oct. 25, 2012).

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permits plaintiff to seek a preliminary injunction.

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“federal, not state, standards govern issuance of a preliminary

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injunction when a federal court is sitting in diversity or

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exercising supplemental jurisdiction over state law claims.”

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at *5; see, e.g., Certified Restoration Dry Cleaning Network,

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L.L.C. v. Tenke Corp., 511 F.3d 535, 541 (6th Cir. 2007) (“[W]e

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apply our own procedural jurisprudence regarding the factors to

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consider in granting a preliminary injunction . . . .”); Equifax

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Servs., Inc. v. Hitz, 905 F.2d 1355, 1361 (10th Cir. 1990)

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(“[T]he doctrine of Erie . . . does not apply to preliminary

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injunction standards . . . .”); Kane v. Chobani, Inc., Case No.:

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12-CV-2425-LHK, 2013 WL 3776172, at *3 (N.D. Cal. July 15, 2013)

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(“[A]pplying federal standards to determine whether a preliminary

The parties do not dispute that state law

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However,

Id.

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injunction should be issued will not alter the final outcome of

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the litigation.”).

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In order to obtain a preliminary injunction, the moving

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party must establish (1) it is likely to succeed on the merits,

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(2) it is likely to suffer irreparable harm in the absence of

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preliminary relief, (3) the balance of equities tips in its

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favor, and (4) an injunction is in the public interest.

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v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20-21 (2008); Humane

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Soc. of the U.S. v. Gutierrez, 558 F.3d 896, 896 (9th Cir. 2009).

Winter

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Injunctive relief is “an extraordinary and drastic remedy, one

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that should not be granted unless the movant, by a clear showing,

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carries the burden of persuasion.”

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U.S. 968, 972 (1997) (per curiam).

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Mazurek v. Armstrong, 520

To determine likelihood of success on the merits, the

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court must first determine whether Rackwise will be likely to

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establish that plaintiff’s shareholders validly removed defendant

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from his positions as CEO, President, and chairman of the board.

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A federal court sitting in diversity applies the choice

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of law rules of the forum state.

Mazza v. Am. Honda Motor Co.,

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666 F.3d 581, 589 (9th Cir. 2012).

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affairs doctrine, “a court must look to the law of the state of

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incorporation with respect to matters involving the regulation of

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[a corporation’s] ‘internal affairs.’”

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v. Korodi, 504 F. Supp. 2d 952, 956 (S.D. Cal. 2007) (citing

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State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal. App.

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4th 434, 442 (2d Dist. 2003)).

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incorporated in Nevada, Nevada law governs its internal affairs.

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Plaintiff argues that shareholders possessing over 75%

Under California’s internal

Patriot Scientific Corp.

Because plaintiff Rackwise is

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of Rackwise’s outstanding stock removed defendant as CEO,

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President, and chairman of the board by written consent.4

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Rackwise bylaws permit the removal of a director by “at least

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seventy-five percent (75%) of the outstanding shares of stock” by

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written consent.

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The

(Rackwise Bylaws § 3.3.)

On March 22, 2017, RFII, pursuant to an existing

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Subscription Agreement, allegedly exercised its warrants and

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purchased 1,448,400 shares of Rackwise stock.

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13-14; Pls.’ Mot., Ex. 2.)

(Imeson Decl. ¶¶

On the same day, Triple R-F exercised

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its warrants and purchased 9,638,740 shares of Rackwise stock.5

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(Richert Decl. ¶¶ 3-4; Richert Supp. Decl. ¶¶ 9-11.)

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23, 2017, Imeson and Richert, as the managing members of the

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entities allegedly holding 79.8% of Rackwise’s outstanding common

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stock, signed a written shareholder action terminating defendant

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from the Board of Directors and as CEO and President of Rackwise.

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(FAC, Ex. F; Imeson Decl. ¶¶ 20-22; Richert Suppl. Decl. ¶¶ 13-

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On March

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Plaintiff also argues that defendant was removed
following a special meeting of the Board of Directors on February
2, 2017. (FAC ¶ 14.) The Rackwise bylaws allegedly permit the
removal of a director by a majority vote of the board; however,
“[w]ritten notice of the time and place of special meetings shall
be delivered personally to each director” at least 48 hours in
advance. (Rackwise Bylaws § 4.4.) It is unclear at this stage
whether all directors received adequate notice of the February 2
meeting, and defendant avers that he, as a director on February
2, did not receive any such notice. (See Archbold Decl. ¶¶ 7,
9.)
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In his opposition, defendant argues that the exercise
of the warrants was not taken “with proper corporate procedure,”
but fails to explain how this action was impermissible either
under the bylaws or Nevada law. At oral argument, defendant
raised for the first time that the warrants were not validly
exercised because he was the only officer, the warrants had to be
delivered to an officer of the corporation, and he never received
notice of the warrants being exercised. Defendant has not
provided documentary evidence supporting this proposition.
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15.)

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section 3.3 of Rackwise’s bylaws and Nevada Revised Statute §

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78.335.

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likelihood of success on its allegation that defendant was

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properly terminated from his positions at Rackwise.

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This action appears to have been taken in compliance with

Therefore, for purposes of this Motion, plaintiffs has a

Plaintiff must next be likely to succeed on the merits

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of its claims.

Where a party asserts multiple claims, plaintiff

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only needs to show he is likely to succeed on the merits of at

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least one claim.

See Fin. Express LLC v. Nowcom Corp., 564 F.

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Supp. 2d 1160, 1168 (C.D. Cal. 2008).

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there are five elements of the tort of intentional interference

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with prospective economic advantage:

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Under California law,

(1)
an
economic
relationship
between
plaintiff and a third party, with the
probability of future economic benefit to the
plaintiff; (2) defendant's knowledge of the
relationship; (3) an intentional act by the
defendant,
designed
to
disrupt
the
relationship; (4) actual disruption of the
relationship; and (5) economic harm to the
plaintiff
proximately
caused
by
the
defendant's
wrongful
act,
including
an
intentional act by the defendant that is
designed to disrupt the relationship between
the plaintiff and a third party.

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Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 944 (2008).

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First, plaintiff had an economic relationship with

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third parties--its customers, including Unisys, and investors.

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Second, defendant, as the purported former CEO, President, and

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chairman of Rackwise, was allegedly aware of these relationships,

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as shown by his alleged communication with Unisys and investors.

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(Imeson Decl. ¶¶ 37-38, 40.)

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intentionally acted with the purpose of interfering with these

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relationships by canceling Unisys’s contract with plaintiff,

Third, defendant allegedly

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communicating with current and former investors, seeking

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additional investments for Rackwise, and filing documents with

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the SEC that created a question as to Rackwise’s leadership.

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(Id. ¶¶ 31-40, 44.)

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disrupted and caused harm to plaintiff by submitting forms with

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the SEC that confuses customers, investors, the public, and the

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SEC as to the proper representatives of the corporation;

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interfering with customer contracts and investor relations; and

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disseminating confidential and proprietary information.

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Lastly, defendant may have actually

(Id. ¶¶

32-34, 37-39, 44, 46-47.)
For purposes of plaintiff’s motion for a preliminary

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injunction, plaintiff has sufficiently shown that it is likely to

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succeed on the merits of its claim.

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Plaintiff must next “establish that irreparable harm is

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likely, not just possible, in order to obtain a preliminary

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injunction.”

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1127, 1131 (9th Cir. 2011) (emphasis in original) (citing Winter,

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555 U.S. at 22).

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simply to prevent the possibility of some remote future injury.”

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Winter, 555 U.S. at 21.

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incapable of measurement, like reputation or goodwill, may

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constitute irreparable harm.”

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Path, LLC, Civ. No. 2:10-2765 WBS GGH, 2010 WL 5418893, at *6

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(E.D. Cal. Dec. 23, 2010).

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All. for the Wild Rockies v. Cottrell, 622 F.3d

“[A] preliminary injunction will not be issued

“[I]ntangible injuries that are

Design Furnishings, Inc. v. Zen

Plaintiff may be irreparably harmed if defendant is not

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enjoined from attempting to access and file documents on

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Rackwise’s behalf using its online SEC account, as he allegedly

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has done in the past, because false or inconsistent filings would
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harm the reputation and goodwill of plaintiff with investors,

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customers, and the SEC.

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account has allegedly had inconsistent Form 8-K filings resulting

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from this dispute, and there is no indication that this would

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change in the future absent injunctive relief.

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also suffer loss of reputation and goodwill from customers and

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investors if defendant is not enjoined from holding himself out

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as Rackwise’s CEO, President, and chairman to customers and

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investors.

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As recently as April 2017, Rackwise’s

Plaintiff may

Further, defendant’s representations that he is the

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CEO, President, and chairman of Rackwise’s board will likely

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result in irreparable harm because defendant would be able to

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enter plaintiff into “transactions which would be difficult to

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unscramble.”

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19, 28 (N.D. Ill. 1978).

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line up potential investments for Rackwise and cancel contracts

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with current customers.

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plaintiff argues that defendant has disseminated confidential and

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proprietary information in a PowerPoint presentation, suggesting

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that defendant may continue to disseminate this information

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absent injunctive relief.

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irreparable harm requirement.

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See Calumet Indus., Inc. v. MacClure, 464 F. Supp.
Defendant is purportedly attempting to

(See Imeson Decl. ¶¶ 37-40.)

(See id. ¶ 34.)

Finally,

Plaintiff has met the

The last two prongs also weigh in favor of issuing a

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preliminary injunction.

Defendant argues the harm he will incur

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if he is improperly enjoined is that he will be prevented from

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continuing to raise money and align future customers for

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Rackwise.

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would only be as a result of his role as the purported President,

While this may cause some harm to defendant, that

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CEO, and chairman of Rackwise’s board.

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defendant is a Rackwise shareholder and whether he has any

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interest in the company beyond the fact he is the “long-time CEO”

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of Rackwise.

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if defendant is not enjoined from holding himself out as CEO and

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President and acting on behalf of Rackwise, as discussed above.

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It is unclear whether

On the other hand, plaintiff may suffer great harm

The public has an interest in avoiding “confusion in

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the marketplace during the interval” and ensuring that only

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proper individuals hold themselves out as a corporation’s

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representatives.

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Ky., Inc., 363 F. Supp. 2d 952, 968 (S.D. Ohio 2005) (finding it

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was in the public interest to prevent the dissemination of items

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bearing plaintiff’s trademark because it avoids confusion in the

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marketplace).

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injunction because the injunction prevents confusion over the

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leadership of Rackwise pending final resolution of this action.

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Cf. Abercrombie & Fitch v. Fashion Shops of

The public therefore has an interest in the

Plaintiff has met the four Winter prongs.

Accordingly,

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the court will grant plaintiff’s Motion for preliminary

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prohibitory injunctive relief.

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In addition to a prohibitory injunction, plaintiff

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seeks a mandatory injunction requiring defendant to disclose the

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identities of all customers and potential investors that

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defendant has contacted since March 22, 2017.

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preliminary relief’ is subject to heightened scrutiny and should

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not be issued unless the facts and law clearly favor the moving

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party.”

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1993) (quoting Anderson v. United States, 612 F.2d 1112, 1114

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(9th Cir. 1980)).

“Such ‘mandatory

Dahl v. HEM Pharm. Corp., 7 F.3d 1399, 1403 (9th Cir.

Plaintiff has not discussed this heightened
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standard, let alone how it has met this standard.

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the court must deny plaintiff’s request for a mandatory

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injunction.

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Accordingly,

Federal Rule of Civil Procedure 65(c) provides that the

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court may require the posting of a security bond “[i]n an amount

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that the court considers proper to pay the costs and damages

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sustained by any party found to have been wrongfully enjoined or

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restrained.”

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meaningful inconvenience to it by the imposition of a bond.

Plaintiff has not presented evidence of any
The

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court considers a bond in the sum of $10,000 to be appropriate

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under the circumstances.

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1228, 1237 (9th Cir. 1999) (holding district court has discretion

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“to determine the amount and appropriateness” of a security

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bond).

See Barahona-Gomez v. Reno, 167 F.3d

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At oral argument, defense counsel raised for the first

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time that any disputes regarding the Subscription Agreements are

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subject to binding, mandatory arbitration.

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decide this issue without briefing from both parties.

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will set briefing and argument for any motion on this issue, but

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the parties may stipulate to an expedited briefing schedule.

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The court declines to
The court

IT IS THEREFORE ORDERED that plaintiff’s Motion for

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preliminary injunction (Docket No. 6) be, and the same hereby is,

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GRANTED IN PART and DENIED IN PART.

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$10,000 bond, pending hearing upon any motion for a permanent

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injunction, defendant Guy Archbold, his agents, and any party

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acting in concert with him or his agents are enjoined from:

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Upon the posting of the

(1) accessing or logging into, or attempting to access
or log into, Rackwise, Inc.’s account in the U.S. SEC’s online
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EDGAR filing system;

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(2) representing himself to anyone as being an officer,

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director, or employee of, or otherwise affiliated with Rackwise,

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Inc.; and

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(3) acting, attempting to act, or purporting to act on
behalf of Rackwise, Inc.

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Plaintiff’s remaining requests for mandatory injunctive
relief are DENIED.

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IT IS FURTHER ORDERED that plaintiff shall file any

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motion to compel arbitration by June 26, 2017.

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such motion shall be filed by July 10, 2017.

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opposition shall be filed by July 17, 2017.

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motion shall take place on July 24, 2017, at 1:30 p.m.

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Dated:

June 13, 2017

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Any opposition to

Any reply to such
Any hearing on such