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