Encompass Holdings Inc. v. Daly et al

Filing 200

ORDER Signed by Magistrate Judge Bernard Zimmerman granting re 170 Brinkman's Motion to Dismiss. (bzsec, COURT STAFF) (Filed on 7/28/2011)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 11 ENCOMPASS HOLDINGS, INC., 12 13 14 Plaintiff(s), v. CAREY F. DALY II, et al., 15 Defendant(s). 16 17 ) ) ) ) ) ) ) ) ) ) ) No. C09-1816 BZ ORDER GRANTING BRINKMAN’S MOTION TO DISMISS Before me is third-party defendant Daren Brinkman’s motion 18 to dismiss the claims asserted against him by defendants Carey 19 F. Daly and Randall J. Lanham (collectively “Daly”) in their 20 third amended “counterclaim” (“TAC”).1 21 2011, I set aside Brinkman’s default and was prepared to grant 22 Brinkman’s motion to dismiss the second amended counterclaim, 23 which only named Brinkman in the RICO claims. 24 represented that, since filing the second amended counterclaim, At a hearing on May 6, Counsel for Daly 25 1 27 All parties have consented to my jurisdiction for all proceedings including entry of final judgment, pursuant to 28 U.S.C. § 636(c). 28 1 26 1 he had discovered substantial additional information that 2 implicated Brinkman and sought leave to file a third amended 3 counterclaim. 4 allegations to these RICO claims, added a claim against 5 Brinkman and others for constructive fraud, and added 6 Brinkman’s name to several of the previous counterclaims which 7 have remained almost exactly the same, (e.g., interference with 8 prospective business advantage, defamation, unfair business 9 practices in violation of California Business and Professions I granted leave. The TAC added more factual 10 Code Section 17200, conspiracy to defraud, and intentional 11 infliction of emotional distress). 12 Brinkman’s motion to dismiss Daly’s constructive fraud 13 claim is GRANTED. 14 omission, or concealment involving a breach of legal or 15 equitable duty which results in damages to another even though 16 the conduct is not otherwise fraudulent. 17 1573; Salahutdin v. Valley of Calif., Inc., 24 Cal.App.4th 555, 18 562 (1994). 19 committee of unsecured creditors during Nacio’s bankruptcy 20 proceedings (Daly was Nacio’s former CEO and an unsecured 21 creditor in the proceedings), is alleged to have breached his 22 fiduciary duty to Daly by revealing Daly’s confidential 23 information to Encompass to help ensure that Encompass’s bid 24 for Nacio was successful, and by submitting false declarations 25 to the bankruptcy court. 26 that Brinkman owed a fiduciary duty to individual unsecured 27 creditors, such as Daly. 28 Constructive fraud consists of any act, Cal. Civ. Code § Brinkman, the attorney who represented the This claim mistakenly presupposes Section 1103(b) of the Bankruptcy Code permits a committee 2 1 to employ an attorney but prohibits that attorney from 2 representing “any other entity having an adverse interest in 3 connection with the case.” 4 are divided on whether an attorney for a committee owes a 5 fiduciary duty to the committee’s constituents. 6 particular circumstances presented here, I am persuaded that 7 the view expressed in 7 Collier on Bankruptcy ¶ 1103.03[7] 8 should apply: 9 The cases construing this provision Under the 16 The professionals represent the committee itself and not the entire class represented by the committee. Some cases have alluded to the concept that a committee professional has a broader duty than simply a duty to the committee [citation omitted]. Such statements are misplaced. The committee itself represents the members of the class and the professionals follow the instructions of the committee. The professionals should not be placed in a position where they are expected or encouraged to second guess the committee as to how best to further the interests of the committee's constituency. Professionals should also take care not to align themselves too closely with particular committee members or with factions on a committee. 17 Owing a fiduciary duty to only the committee rather than 18 each individual unsecured creditor recognizes that individual 19 members of the committee or individual creditors often have 20 adverse interests, which prevents an attorney from being in a 21 fiduciary relationship with each of them. 22 true here, where Daly alleges he voluntarily created a 23 confidential relationship with Brinkman and gave him 24 information which Brinkman was supposed to keep secret from 25 other unsecured creditors like Encompass and Encompass’s CEO. 26 Under such circumstances, Brinkman did not owe Daly a fiduciary 27 duty and cannot be liable for constructive fraud. 10 11 12 13 14 15 28 This is particularly Another flaw in this and Daly’s other state law claims is 3 1 that Brinkman’s alleged filing of false declarations with the 2 bankruptcy court was privileged conduct. 3 counterclaims arise under state law, state privileges apply. 4 Evidence Rule 501. 5 absolute privilege for statements made in the course of a 6 judicial proceeding. 7 state law claims are based on the allegedly false bankruptcy 8 court declarations, they are not actionable. 9 Raboff, 46 Cal. 2d 375, 381 (1956); Pollock v. University of 10 Southern California, (2003) 112 Cal.App.4th 1416, 1430-1431. 11 (applying § 47 to a declaration filed in a lawsuit). 12 Since most of Daly’s California Civil Code § 47 provides an Accordingly, to the extent any of Daly’s See Albertson v. Brinkman’s motion to dismiss Daly’s claim for interference 13 with prospective business advantage is also GRANTED. 14 recover for this tort, plaintiffs must prove the following 15 elements: 16 17 18 19 20 To 1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant. 21 Youst v. Longo, 43 Cal.3d 64, 71 (1987). Daly has pled an 22 agreement with a third party to negotiate an infusion of new 23 capital into Nacio and that Encompass’s CEO knew about this 24 economic relationship. 25 that Brinkman was aware of this relationship. 26 Daly’s counsel argued that Brinkman’s knowledge about the 27 letter of intent and economic relationship can be inferred 28 because Brinkman was working with Encompass’s CEO. But nowhere in the TAC has Daly pled 4 At the hearing, I am 1 unwilling to make such inferences about unpled facts, 2 particularly since Daly has had multiple opportunities to amend 3 his counterclaim in the more than two years since this action 4 was filed and has never alleged that Brinkman knew about this 5 economic relationship. 6 Brinkman next challenges Daly’s defamation claim. This 7 tort requires Daly to establish “the intentional publication of 8 a statement of fact that is false, unprivileged, and has a 9 natural tendency to injure or which causes special damage.” 10 Smith v. Maldonado, 72 Cal.App.4th 637, 645 (1999); Cal. Civ. 11 Code §§ 45-46. 12 that do not identify the substance of what was said are 13 insufficient to withstand a motion to dismiss. 14 County Health and Social Services Dept., 459 F.Supp.2d 959, 973 15 (E.D. Cal. 2006); Jacobson v. Schwarzenegger, 357 F.Supp.2d 16 1198, 1216 (C.D. Cal. 2004). 17 Brinkman’s employee, Joseph Berardi, and others met with a 18 “high-level employee” of Nacio and provided him with documents 19 falsely claiming that Encompass was in control of Nacio. 20 allegation, however, does not entitle Daly to relief for 21 defamation because the statement that Encompass was in control 22 of Nacio does not defame Daly. 23 (“Publication means communication to a third person who 24 understands the defamatory meaning of the statement and its 25 application to the person to whom reference is made”)(internal 26 citations and quotations omitted). 27 Berardi told the “high-level employee” that Daly had been 28 terminated as CEO for breaching his agreement with Encompass General allegations of defamatory statements Scott v. Solano In the TAC, Daly alleges that This See Scott, 459 F.Supp.2d at 973 5 The TAC also alleges that 1 and wrongfully taking over Nacio. 2 in the TAC that Berardi’s statement was false.2 3 has failed to identify any statements that adequately plead the 4 elements of defamation, the claim is DISMISSED. 5 6 7 8 9 10 But there is no allegation Because Daly I also DISMISS Daly’s claim for intentional infliction of emotional distress. The elements of this tort are: (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff[] suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant’s outrageous conduct. 11 Christensen v. Superior Court, 54 Cal.3d 868, 903 12 (1991)(quoting Davidson v. City of Westminister, 32 Cal.3d 197, 13 209 (1982)). 14 extreme as to exceed all bounds of that usually tolerated in a 15 civilized community.” 16 Brinkman amount to conduct that meets this definition of 17 outrageous. 18 infliction of emotional distress on his allegations for fraud, 19 defamation, unfair business practices, and interference with 20 prospective business advantage, each of which I have found to 21 be insufficient to state a valid claim for relief. For conduct to be outrageous, it must be “so Id. None of Daly’s allegations against Moreover, Daly bases his claim for intentional 22 Daly’s TAC further alleges that Brinkman is liable for 23 conspiracy to defraud and conspiracy to commit substantive RICO 24 offenses. 25 entered into a conspiracy with others as well as to allege the These claims require Daly to allege that Brinkman 26 27 28 2 Neither in his opposition nor when asked at the hearing, did Daly point out where he alleged that Berardi’s statement was false. 6 1 underlying wrongs. 2 Saudi Arabia Ltd., 7 Cal.4th 503, 510-11 (1994); Salinas v. 3 U.S., 522 U.S. 52, 63 (1997). 4 fashion that Brinkman entered into a conspiracy with Encompass 5 and other third-party defendants. 6 this conclusory allegation with any facts which show that 7 Brinkman intended or even knew that he was entering into a 8 conspiracy with others. 9 some of which date back to 1999, discuss conduct of other 10 parties, such as Encompass and its directors, engaging in 11 alleged criminal enterprises. 12 was involved in any of this conduct or even knew about it. 13 Most importantly, Brinkman is not alleged to have any 14 involvement with the underlying business agreement between Daly 15 and Encompass that led to this dispute. 16 only connected to the other defendants and allegations in the 17 TAC through Daly’s assertion that Encompass and its CEO 18 “enlisted the aid and cooperation of Brinkman” during the 19 bankruptcy proceedings. 20 acted in concert with Encompass and manipulated the bankruptcy 21 bid process, submitted false declarations to the bankruptcy 22 court, and terminated Daly’s employment with Nacio. 23 however, never pleads any factual allegations that support the 24 claim that Brinkman agreed to pursue the fraudulent or criminal 25 objective of any conspiracy between Encompass and others. 26 Without such a connection, Brinkman cannot be liable for 27 conspiracy. 28 See Applied Equipment Corp., v. Litton Here, Daly asserts in conclusory But Daly fails to support Most of Daly’s factual allegations, Daly never alleges that Brinkman Instead, Brinkman is Daly goes on to allege that Brinkman Daly, To counter Brinkman’s position that the TAC lacks 7 1 sufficient factual allegations, Daly resorts to the argument 2 that he has previously used when other third-party defendants 3 moved to dismiss his claims. 4 adequately asserted his claims because federal pleading 5 standards are not stringent and only require him to provide 6 other parties with notice of his claims. 7 previous orders, this is not the case after Bell Atlantic Corp. 8 v. Twombly, 550 U.S. 544, 555 (2007), and Ashcroft v. Iqbal, 9 129 S.Ct. 1937, 1949 (2009), which found that plaintiffs must Daly contends that he has As I explained in 10 do more than plead a “formulaic recitation of the elements of a 11 cause of action” and must instead plead “factual content that 12 allows the court to draw a reasonable inference that the 13 defendant is liable for the misconduct alleged.” 14 Brinkman’s motion is GRANTED with respect to Daly’s claims 15 under the RICO Act and for conspiracy to defraud. Accordingly, 16 Lastly, Daly’s Section 17200 claim, which prohibits “any 17 unlawful, unfair, or fraudulent business act or practice,” is 18 DISMISSED. 19 320 (2011).3 20 conduct under Section 17200 because I have dismissed Daly’s 21 other claims and he has not identified any other unlawful 22 conduct for which Brinkman would be liable. 23 Servicing, 653 F.Supp.2d 1047, 1056 (E.D. Cal. 2009)(“The 24 viability of a claim under [Section 17200's unlawful prong] 25 depends on the viability of an underlying claim of unlawful Kwikset Corp. v. Superior Court, 51 Cal.4th 310, Daly can no longer predicate a claim for unlawful See Nool v. HomeQ 26 27 28 3 Because Section 17200 is written in the disjunctive, it affords relief for all three types of unfair competition. Pastoria v. Nationwide Ins., 112 Cal.App.4th 1490, 1496 (2003). 8 1 conduct”). 2 be based solely on the other claims asserted by Daly which have 3 now been dismissed. 4 business practice of Brinkman’s that would support the claim 5 that members of the public were deceived. Daly’s claim of fraudulent conduct also appears to Daly’s TAC does not identify any other 6 With respect to the unfair prong, Daly does not identify 7 which of Brinkman’s practices outside of the dismissed claims 8 were unfair. 9 that any allegations of unfairness be connected to a Moreover, Daly’s TAC has not met the requirement 10 legislatively declared policy. 11 Inc. v. Los Angeles Cellular Telephone Company, the Court held 12 that in actions where competitors allege anticompetitive 13 practices, any finding of unfairness under Section 17200 must 14 “be tethered to some legislatively declared policy or proof of 15 some actual or threatened impact on competition.” 16 163, 186-76 (1999). 17 not directly addressed the definition of unfair for consumer 18 claims under Section 17200, multiple courts have held that such 19 claims for unfairness must similarly be tethered to a 20 legislative policy in order to be actionable. 21 Capital One Bank, 2007 WL 3343943 at *11 (N.D. Cal. 22 2007)(“Although the California Supreme Court did not reach the 23 issue of consumer cases, the rationale of Cel-Tech nonetheless 24 compels the conclusion, at least in this Court's judgment, that 25 the unfairness prong must also be tethered to some legislative 26 policy; otherwise the courts will roam across the landscape of 27 consumer transactions picking and choosing which they like and 28 which they dislike); Simila v. American Sterling Bank, 2010 WL In Cel-Tech Communications, 20 Cal.4th Although the California Supreme Court has 9 See Van Slyke v. 1 3988171 at *6 (S.D. Cal. 2010)(discussing the division among 2 California courts with respect to the application of the 3 tethering and balancing tests under the unfair prong and 4 finding that the tethering test is “more in line with the 5 California Supreme Court’s reasoning in Cel-Tech”). 6 deciding whether Daly’s relation to Brinkman is more like a 7 consumer or a competitor, Daly’s TAC fails to connect his 8 unfairness allegations, whatever they may be, to any 9 legislative policy. For the foregoing reasons, IT IS ORDERED 10 that Brinkman’s motion to dismiss is GRANTED WITH PREJUDICE.4 11 Dated: July 28, 2011 Without 12 13 Bernard Zimmerman United States Magistrate Judge 14 G:\BZALL\-BZCASES\ENCOMPASS V. DALY\ORDER GRANTING BRINKMAN'S MOTION TO DISMISS.wpd 15 16 17 18 19 20 21 22 4 23 24 25 26 27 28 Daly did not ask for leave to amend in his papers or at the hearing. Had he, it is not likely I would have granted it because Daly has already had several chances to amend his counterclaim. Furthermore, this action is now over two years old, discovery closes soon and trial is less than five months away. See Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th Cir. 1989)(“In deciding whether justice requires granting leave to amend, factors to be considered include the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party and futility of the proposed amendment”). 10

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