Dollar Tree Stores, Inc. v. Toyama Partners, LLC et al

Filing 277

ORDER GRANTING PLAINTIFF'S MOTION TO CONSOLIDATE; DENYING DEFENDANTS' MOTIONS TO DISMISS re #228 . An amended complaint, or alternatively, a plan of coordination is due 8/12/11. (SI, COURT STAFF) (Filed on 8/1/2011) Modified on 8/2/2011 (ys, COURT STAFF).

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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DOLLAR TREE STORES INC.,

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United States District Court
For the Northern District of California

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No. C 10-0325 SI; Related Case No. C 112696 SI

Plaintiff,
ORDER GRANTING PLAINTIFF’S
MOTION TO CONSOLIDATE;
DENYING DEFENDANTS’ MOTIONS
TO DISMISS

v.
TOYAMA PARTNERS LLC,

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Defendant.

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On July 29, 2011, the Court held a hearing on plaintiff’s motion to consolidate cases and

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defendants’ motions to dismiss Dollar Tree v. Pau et al., C 11-2696 SI. For the reasons set forth below,

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the Court GRANTS plaintiff’s motion to consolidate cases, and DENIES defendants’ motions to dismiss

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C 11-2696 SI.

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BACKGROUND

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The factual background of Dollar Tree v. Toyama et al., C 10-325 SI has been set forth in detail

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in numerous prior orders and is hereby incorporated by reference. As relevant to the instant motions,

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Dollar Tree has amended the 10-325 SI complaint three times, most recently on April 5, 2011, pursuant

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to a stipulation by the parties. The third amended complaint added successor liability claims against

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defendant Capella-Mowry LLC (“Capella”), based upon Capella’s acquisition of the Shopping Center.

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The parties dispute when defendants Toyama and Pau disclosed to Dollar Tree that the Shopping

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Center would be sold to Capella, as well as when defendants produced the documents related to the sale

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to Dollar Tree. According to the complaint filed in Dollar Tree v. Pau et al., C 11-2696 SI, Toyama

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entered into the Sale Agreement agreeing to sell the Shopping Center to Capella on January 18, 2011.

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Compl. ¶ 32. The complaint alleges that the Sale Agreement was signed by defendant Peter Pau, on

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behalf of Toyama, and by Peter Pau, on behalf of Capella. Id. ¶ 33. Pau is both the manager of Toyama

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and the manager of Capella, and the complaint alleges that Pau “had complete control over the

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management and decision-making authority of both entities.” Id.

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The complaint alleges that the Sale Agreement (i) affirmatively obligated Toyama to settle

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Dollar Tree’s claims and (ii) affirmatively obligated Capella to construct a store in the Shopping Center

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for Dollar Tree, secured by a Letter of Credit. Id. ¶ 38. Paragraph 7.3(b) of the Sale Agreement states,

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Dollar Claims. Seller shall enter into a full settlement with Dollar Tree and shall make
such cash payments required thereunder as may be required by Dollar Tree; however,
it is currently contemplated that Dollar Tree will require (i) construction of its leased
premises, and (ii) the posting of Letter of Credit in favor of Dollar Tree in the amount
of [REDACTED], as security for such construction obligation; and upon Closing Buyer
shall assume such obligations.

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United States District Court
For the Northern District of California

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Compl. ¶ 38 & Ex. 2 (Sale Agreement ¶ 7.3(b)). Pursuant to Paragraphs 6.3.1(2) and 6.3.2(2) of the
Sale Agreement, Toyama and Capella were required at closing to deliver an executed Assignment and
Bill of Sale attached to the Sale Agreement, attached as Exhibit B to the Sale Agreement. Compl. ¶ 38
& Sale Agreement, Ex. B. The Assignment and Bill of Sale provided in part that:
[Toyama] assigns, transfers, sets over and conveys to [Capella] all of [Toyama’s] right,
title and interest in, to and under . . .[t]he existing leases of any of the Land or
improvements thereon (“Leases”) . . .
Sale Agreement, Ex. B ¶ 1(1). The Assignment and Bill of Sale also provided that “[Capella] accepts
the Leases” and “assumes all obligations under the Leases,” which included Dollar Tree’s Amended
Lease. Sale Agreement, Ex. B ¶ 2.
Section R of Dollar Tree’s Amended Lease provides in relevant part that “any successor to
Landlord’s interest in the Premises . . . shall, so long as Tenant [Dollar Tree] is not in material default
under this Lease is beyond applicable notice and cure periods, recognize and accept this Lease and all
terms, conditions, and obligations of Landlord contained herein.” Compl. ¶ 41. The Amended Lease
also states in relevant part, “This Lease and all of the covenants, provisions, and conditions herein
contained shall inure to the benefit of and be binding upon the heirs, personal representatives,
successors, and assigns, respectively, of the parties hereto . . .” Compl. ¶ 21 (Amended Lease ¶ W(16)).
In addition, in Paragraph 8.3 of the Sale Agreement, Toyama represented and warranted that, as of the
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Effective Date of the Sale Agreement, “The execution, delivery and performance of this Agreement and

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the Closing hereunder will not conflict with any agreement, contract or law applicable to [Toyama] nor

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constitute a default under any agreement or instrument to which [Toyama] is a party or by which

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[Toyama] or the Property are bound.” Sale Agreement ¶ 8.3.

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On January 24, 2011, Toyama and Capella entered into a First Amendment to the Sale

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Agreement (“First Amendment”) in which they reduced the purchase price of the Shopping Center.

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Compl. ¶ 45 & Ex. 3. The First Amendment did not modify Toyama’s assignment of Leases to Capella,

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nor did it modify Capella’s assumption of all obligations under the Leases. Compl.¶ 47 & Ex. 3. The

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First Amendment was signed by Peter Pau on behalf of both Toyama and Capella. Compl. ¶ 48 & Ex.

United States District Court
For the Northern District of California

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3.

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On February 15, 2011, Toyama and Capella entered into a Second Amendment to the Sale

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Agreement. Compl. ¶ 49 & Ex. 4. The complaint alleges that “[t]he sole purpose of the Second

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Amendment was to revoke Toyama’s obligation to settle Dollar Tree’s claims and revoke Capella’s

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obligations to construct the Replacement Premises and accept and assume Dollar Tree’s Amended

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Lease.” Compl. ¶ 49. Peter Pau signed the Second Amendment on behalf of both Toyama and Capella.

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Compl. ¶ 50 & Ex. 4. The complaint alleges,

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While Section 7.3(b) of the Sale Agreement stated that Toyama “shall enter into a full
settlement with Dollar Tree,” the Second Amendment, without consideration, provided
that Toyama “may, but shall not be required, to enter into a full settlement with Dollar
Tree within a reasonable time after Closing.”
Id. ¶ 51 (emphasis in original, quoting Sale Agreement ¶ 7.3(b) and Second Amendment).
The Second Amendment also revised the Assignment and Bill of Sale to state that Toyama
would assign to Capella all of Toyama’s “right, title, and interest” in “[t]he existing leases of any of the
Land or improvements thereon . . . but specifically excluding the Dollar Tree Lease (‘Leases’).” Compl.
Ex. 4, Ex. B ¶ 1(1). The Second Amendment provided in the Assignment and Bill of Sale that Capella
would accept the Leases, but also stated, “As set forth above, the Leases specifically exclude the Dollar
Tree Lease, and Buyer does not accept or assume the Dollar Tree Lease.” Id. ¶ 2.
The complaint alleges that “[b]y executing the Second Amendment on behalf of Toyama and
Capella, Pau (i) breached Toyama’s obligations in Sections R and W(16) of the Amended Lease to
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ensure that any successor to the Shopping Center would accept and assume all of Toyama’s obligations

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under the Amended Lease and (ii) breached Toyama’s representation and warranty to Capella in Section

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8.3 of the Sale Agreement that the transaction would not breach any agreement by which Toyama or the

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Property was bound.” Compl. ¶ 54.

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The complaint also alleges that “[a]t and prior to the time of closing, Toyama was unable to pay

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its debts as they became due in the normal course of business and was insolvent under one or more of

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the generally-accepted financial accounting tests.” Id. ¶ 56. The complaint alleges that Toyama paid

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the majority of the proceeds from the sale fo the Shopping Center to its mortgagor, Comerica. Id. ¶ 57.

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“From the remaining proceeds of the sale of the Shopping Center, Pau (i) repaid himself [the money]

United States District Court
For the Northern District of California

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that he purportedly loaned to Toyama and (ii) paid claims to other creditors of Toyama.” Id.

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On June 3, 2011, Dollar Tree filed the complaint in C 11-2696 SI. The complaint alleges two

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claims: (1) fraudulent conveyance under California’s Uniform Fraudulent Transfer Act, Cal. Civ. Code

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§ 3439 et seq., against Pau, Toyama and Capella, and (2) breach of fiduciary duty, against Pau.

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DISCUSSION

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Now before the Court are three interrelated motions: (1) plaintiffs’ motion to consolidate 10-325

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SI and 11-2696 SI, (2) defendants’ motion to dismiss 11-2696 SI as improperly filed, and (3)

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defendant’s motion to dismiss 11-2696 SI pursuant to Rule 12(b)(6). Defendants oppose consolidation

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of the two cases, and argue that plaintiff never should have filed the second action and instead should

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have sought leave to amend the complaint in the first action. Defendants also contend that plaintiff has

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failed to state claims for fraudulent conveyance and breach of fiduciary duty in the second action.

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Plaintiff responds that it could not seek to amend the complaint in the first action because, inter

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alia, the documents related to the sale, such as the January 18, 2011 Sale Agreement, the January 24,

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2011 First Amendment, and the February 15, 2011 Second Amendment, were not provided to plaintiff

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until April 22, 2011, after the deadline for amending the pleadings in 10-325 SI.

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The parties devote much of their voluminous briefing to ad hominem attacks that do not aid the

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Court in its determination of these motions. The parties also hotly dispute the facts regarding when

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defendants disclosed the fact of, and the details regarding, the sale of the Shopping Center; for purposes
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of these motions, the Court finds it unnecessary to resolve these factual disputes. The Court agrees with

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defendants that plaintiff should have sought leave to amend the complaint in the first action, even if such

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motion was filed after the deadline for amending the complaint, rather than filing a second case.

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However, given the fact that plaintiff filed a second action, the Court finds that the most efficient course

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is to determine whether plaintiff has stated claims in the second action, and if so, to consolidate the two

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cases, rather than dismissing the second action and requiring plaintiff to file a motion to amend the

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complaint in the first case.

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I.

Fraudulent conveyance

United States District Court
For the Northern District of California

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Dollar Tree alleges a claim of fraudulent conveyance under the Uniform Fraudulent Transfer Act

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(“UFTA”), California Civil Code § 3439 et seq., against defendants Pau, Toyama, and Capella-Mowry.

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“The UFTA permits defrauded creditors to reach property in the hands of a transferee.” Mejia v. Reed,

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31 Cal. 4th 657, 663 (2003). “Under the UFTA, a transfer is fraudulent, both as to present and future

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creditors, if it is made ‘[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.’ (Civ.

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Code, § 3439.04, subd. (a).) .” Id. at 664.

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The complaint alleges that “[t]he Second Amendment was a mode of disposing of or parting with

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an interest in an asset and therefore constitutes a ‘transfer’ within the meaning of [the statute].” Compl.

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¶ 60. The complaint alleges,

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Pau entered into the Second Amendment on behalf of both Toyama and Capella with the
intent to hinder, delay and/or defraud Dollar Tree with regard to, inter alia, (i) Toyama’s
obligation to settle with Dollar Tree, (ii) Capella’s obligations to construct a retail store
for Dollar Tree and post a . . . letter of credit as security, (iii) Capella’s obligation to
accept and assume Dollar Tree’s Amended Lease, and (iv) Dollar Tree’s ability to
execute upon the Shopping Center in order to obtain money damages and/or injunctive
relief from Toyama.

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Id. ¶ 61. The complaint also alleges that defendants’ fraudulent intent is demonstrated by the following

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“badges of fraud”:

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(a)

The Second Amendment was executed by Pau as an insider of both Toyama and
Capella;

(b)

Pau controlled the Shopping Center as manager of Toyama and Capella both
before and after the Second Amendment;

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(c)

Neither Toyama, Capella, nor Pau disclosed the sale of the Shopping Center,
including without limitation the Second Amendment, to Dollar Tree prior to the
closing;

(d)

Pau executed the Second Amendment well after Dollar Tree filed its lawsuit
against Toyama;

(e)

The Second Amendment facilitated the closing on the Shopping Center, which
disposed of substantially all of Toyama’s assets;

(f)

Pau, Capella, and Toyama refused to provide Dollar Tree with documents or
information regarding the sale of the Shopping Center, including without
limitation the Second Amendment; and

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Toyama was insolvent prior to and at the time that it entered into the Second
Amendment and closed on the sale of the Shopping Center.

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United States District Court
For the Northern District of California

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Id. ¶ 62.

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A.

“Transfer”

Defendants contend that Dollar Tree has not alleged a “transfer” under the UFTA because the
Second Amendment is only an isolated provision of the sales contract, and not the sales contract itself.
Dollar Tree responds that the Second Amendment is part of the Sale Agreement, as the Second
Amendment states that the Sale Agreement “is incorporated herein by reference,” and that “Buyer and
Seller amend the Original [Sale] Agreement as follows[.]” Compl. Ex. 4. Dollar Tree argues that all
provisions of a contract must be considered as a whole, see Cal. Civ. Code § 1641, and that it has
focused on the Second Amendment because that is where defendants’ fraud is manifested.
Dollar Tree contends that the UFTA has a very broad definition of “transfer,” and that the
Second Amendment (and the incorporated Sale Agreement) fall within the statutory definition. The
UFTA defines “transfer” as follows:
“Transfer” means every mode, direct or indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with an asset or an interest in an asset, and
includes payment of money, release, lease, and creation of a lien or other encumbrance.
Cal. Civ. Code § 3439.01(i). Dollar Tree contends that the sales documents, which include the Second
Amendment, were the direct and/or indirect mode that Pau used to part with Toyama’s interest in the
Shopping Center. Compl. ¶¶ 49-54. Dollar Tree asserts, “Defendants want this Court to believe that,
if there was no fraud in the Grant Deed itself, the UFTA cannot apply. . . . The UFTA defines a transfer
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more broadly – every direct and/or indirect mode of parting with an interest in an asset – and that

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broader definition must be applied here. Moreover, since the substantive terms of the sale are contained

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in the Sale Agreement and its amendments, to limit consideration of the transaction to the simple

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language of the Grant Deed would make a mockery of the UFTA and encourage the type of fraud in

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which Defendants have engaged here.” Opp’n at 9:16-25.
Defendants contend that by admitting that the transfer at issue was the sale of the Shopping

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Center pursuant to the Sale Agreement, of which the Second Amendment was only a part, Dollar Tree

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is “essentially seeking to rewrite the Sales Agreement rather than to set aside any fraudulent transfer.”

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Reply at 3:21-23, 4:10-11. Defendants argue that Dollar Tree’s claim is not a proper UFTA claim

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United States District Court
For the Northern District of California

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because Dollar Tree does not seek to set aside the sale of the Shopping Center, but instead to rewrite

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the contract of sale.

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Dollar Tree contends that defendants ignore the plain language of the UFTA, which provide for

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broad remedies to ameliorate fraudulent transfers. Dollar Tree notes that Section 3439.07 provides that

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“In an action for relief against a transfer or obligation under this chapter, a creditor . . . may obtain . .

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(1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s
claim.
(2) An attachment or other provisional remedy against the asset transferred or its
proceeds . . . .
(3) Subject to applicable principles of equity and in accordance with applicable rules of
civil procedure, the following:
(A) An injunction against further disposition by the debtor or a
transferee, or both, of the asset transferred or its proceeds.
(B) Appointment of a receiver to take charge of the asset transferred or
its proceeds.
(C) Any other relief the circumstances may require.
Cal. Civ. Code § 3439.07(a) (emphasis added). Dollar Tree argues that the UFTA specifically
authorizes avoidance of the Second Amendment because it permits “avoidance of the transfer . . . to the
extent necessary” and authorizes “any other relief the circumstances may require.”

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The Court agrees with Dollar Tree that it has properly alleged that it seeks to avoid a fraudulent

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transfer. Annod Corporation v. Hamilton & Samuels, 100 Cal. App. 4th 1286 (2002), relied upon by

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defendants, is distinguishable. In Annod, a landlord sued the individual partners in a defunct law firm

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for nonpayment of rent. The landlord claimed that the law firm partners had drained the law firm of its

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assets by taking partnership draws instead of paying overdue rent. Id. at 1291. The trial court granted

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the defendants’ motions for summary judgment, finding that there were no material disputes regarding

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whether the partnership draws were made in good faith and for reasonably equivalent value. Id. The

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Court of Appeal affirmed. Defendants cite Annod for the proposition that the UFTA does not provide

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for the rewriting of contracts relating to transfers. However, in the portion of Annod that defendants

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United States District Court
For the Northern District of California

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cite, the court simply stated that the landlord “knowingly accepted as part and parcel of the lease

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agreement” the risk that partners would receive partnership draws while failing to pay their rent. Id. at

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1300.

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The lease contained reciprocal waivers. The landlord agreed not to “seek recourse
against the individual partners, directors, officers or shareholders of [the tenant] or any
of their personal asserts for satisfaction of any liability with respect to [the lease]” and
the tenant agreed not to “seek recourse against the individual partners, directors, officers
or shareholder[s] of [the landlord] or any of their personal asserts for satisfaction of any
liability with respect to [the lease].” The lease provided a bargained-for two-way release
of liability. Applied in retrospect, it may have been a bad deal for the landlord, but that
was the risk the landlord took and we will not rewrite the lease to delete the nonrecourse
provision.

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Id.

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Annod is distinguishable in numerous respects. First, as plaintiff notes, Annod was decided on

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summary judgment, and not on a demurrer. More importantly, the landlord in Annod did not claim that

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the lease provision enabled the fraudulent transfer, whereas here, Dollar Tree claims that the Second

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Amendment was the “direct and/or indirect mode” of “disposing of or parting with an interest in an

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asset.” Annod does not stand for the proposition that the UFTA does not permit the rewriting of a

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contract. In any event, the Court does not view the relief sought here as rewriting a contract. Rather,

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Dollar Tree seeks to void the transfer – as set forth in the Second Amendment – “to the extent

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necessary.”

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B.

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Defendants also argue that Dollar Tree has failed to sufficiently allege “intent to defraud” under

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Section 3439.04(a)(1). The Court disagrees. Section 3439.04(b) provides eleven different factors that

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may be considered as evidence of intent to defraud:

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Intent to defraud

(b) In determining actual intent under paragraph (1) of subdivision (a), consideration
may be given, among other factors, to any or all of the following:

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(1) Whether the transfer or obligation was to an insider.
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(2) Whether the debtor retained possession or control of the property
transferred after the transfer.

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(3) Whether the transfer or obligation was disclosed or concealed.

United States District Court
For the Northern District of California

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(4) Whether before the transfer was made or obligation was incurred, the
debtor had been sued or threatened with suit.
(5) Whether the transfer was of substantially all the debtor’s assets.
(6) Whether the debtor absconded.
(7) Whether the debtor removed or concealed assets.
(8) Whether the value of the consideration received by the debtor was
reasonably equivalent to the value of the asset transferred or the amount
of the obligation incurred.
(9) Whether the debtor was insolvent or became insolvent shortly after
the transfer was made or the obligation was incurred.
(10) Whether the transfer occurred shortly before or shortly after a
substantial debt was incurred.
(11) Whether the debtor transferred the essential assets of the business to
a lienholder who transferred the assets to an insider of the debtor.
Cal. Civ. Code § 3439.04(b)(1)-(11).

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Defendants concede that the complaint alleges at least three of these factors – the debtor’s

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insolvency, the transfer of substantially all of the debtor’s assets, and that the transfer was made after

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the filing of a lawsuit. Defs’ 12(b)(6) Motion at 9:25-28; Reply at 7:4-7. Defendants assert that “these

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[factors] alone do not indicate fraudulent intent,” Reply at 7:6-7, and that Dollar Tree “does not even

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try to allege” some of the other statutory factors. Id. at 7:16.

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Defendants’ arguments are flawed in several respects. As an initial matter, the California Court

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of Appeal has held that the Section 3439.04(b) “factors do not create a mathematical formula to
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establish actual intent. There is no minimum number of factors that must be present before the scales

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tip in favor of finding of actual intent to defraud. This list of factors is meant to provide guidance to the

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trial court, not compel a finding one way or the other.” Filip v. Bucurenciu, 129 Cal. App. 4th 825, 834

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(2005). Thus, contrary to defendants’ assertions, a plaintiff may prove actual intent to fraud based on

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three factors (or less). More importantly, on a motion to dismiss, the Court’s review is limited to the

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sufficiency of the allegations. Here, the complaint alleges at least three of the badges of fraud, and

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arguably more. This is adequate to state a claim.1

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II.

Breach of fiduciary duty

United States District Court
For the Northern District of California

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Dollar Tree alleges a claim for breach of fiduciary duty against Pau only. The complaint alleges

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that by virtue of Toyama’s insolvency, Pau owed a fiduciary duty to Toyama’s creditors, including

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Dollar Tree, to manage Toyama’s assets in trust for the benefit of all creditors. Compl. ¶ 66. The

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complaint alleges that Pau “had an irreconcilable conflict of interest in entering into the Second

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Amendment as manager of both Toyama and Capella.” Id. The complaint alleges that “Pau breached

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his fiduciary duties to Dollar Tree by distributing proceeds from the sale of the Shopping Center to

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himself and thereby engaging in self dealing,” and “by distributing proceeds . . . to other creditors to the

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exclusion of Dollar Tree, thereby preferring certain creditors over Dollar Tree.” Id. ¶¶ 67-68.

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Defendants move to dismiss this claim, relying primarily on Berg & Berg Enterprises, LLC v.

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Boyle, 178 Cal. App. 4th 1020 (2009). In Berg, Berg & Berg Enterprises was the largest creditor of a

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failed company, Pluris, Inc. Berg alleged that the individual directors of Pluris owed a fiduciary duty

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to Berg and Pluris’s other creditors when Pluris either became insolvent or entered into a “zone of

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insolvency.” Id. at 1024. Berg alleged that Pluris breached its fiduciary duty by entering into an

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Defendants also assert, confusingly, that plaintiff’s claim for fraudulent conveyance is really
a claim for third party beneficiary status under the Sale Agreement, or a breach of contract claim under
the Amended Lease. As the Court has concluded that plaintiff has stated a claim under the UFTA, the
Court finds it unnecessary to address these arguments.
Defendants also assert that Dollar Tree’s successor liability theory against Capella defeats, rather
than supports, the UFTA claim. This argument is without merit, as plaintiff is permitted to plead
alternative theories of liability. Fed. R. Civ. Proc. 8(d)(2).
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assignment for the benefit of creditors under Cal. Civ. Code §§ 493.010 and 1802,2 “thereby

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extinguishing Berg’s plan to use the corporation’s alleged $50 million of net operating losses through

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a chapter 11 bankruptcy reorganization that, according to Berg, would have benefitted it and the other

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creditors by deriving value from the losses.” Id. at 1025.

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Defendants contend that under Berg, Dollar Tree lacks standing to bring a breach of fiduciary

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duty claim; that the scope of the fiduciary duty recognized in Berg is extremely limited and does not

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apply to the facts alleged here; and that in any event, the business judgment rule bars Dollar Tree’s

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claim. Dollar Tree, in turn, asserts that it has properly alleged a claim under Berg.

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United States District Court
For the Northern District of California

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A.

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The parties first dispute whether Dollar Tree has standing to bring a breach of fiduciary duty

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claim. Defendants contend that Dollar Tree must bring this claim as a derivative action because Dollar

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Tree did not suffer an injury unique to it. Defendants rely on Berg, where the trial court sustained a

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demurrer to the original complaint on standing grounds.3 The Court of Appeal described the ruling as

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follows:

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Standing

The court (Judge C. Randall Schneider) sustained the demurrers with leave to amend.
The basis of the order was, in essence, lack of standing—Berg’s claim of injury was not
unique to itself or to a particular class of creditors but rather incidental to injury that all
of Pluris’s creditors might have suffered as a result of the assignment for the benefit of
creditors. Therefore, the claim was not direct and particular to Berg but rather derivative
and assertable only on behalf of all of Pluris’s creditors.
Berg, 174 Cal. App. 4th at 1027.
Defendants contend that Dollar Tree lacks standing because “it is clear from [Dollar Tree’s]
allegations that the payments to Comerica and other creditors prevented Toyama from paying all other
creditors, not just [Dollar Tree].” Reply at 10: 2-4. To the contrary, the complaint does not contain any
such allegations showing that Dollar Tree is similarly situated to other creditors. Instead, the complaint
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The Berg court explained that “[a]n assignment for the benefit of creditors is a recognized but
less than comprehensive statutory procedure that is an alternative to liquidation in bankruptcy.” Id. at
1025 n.1.
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After this ruling, the plaintiff in Berg amended the complaint several more times. On appeal,
the Court of Appeal reviewed the trial court’s dismissal of the third amended complaint without leave
to amend. Berg, 174 Cal. App. 4th at 1029.
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alleges that Pau used the proceeds of the sale to pay Comerica, himself, and other creditors, and more

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importantly, that Pau executed the Second Amendment specifically to shield Toyama’s assets from

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Dollar Tree. As such, Dollar Tree has alleged an injury “direct and particular” to itself, and thus has

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standing to allege a breach of fiduciary duty claim.

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B.

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After analyzing the case law on the duty owed by an insolvent corporation to its creditors, the

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Berg court stated, “we conclude that under the current state of California law, there is no broad,

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United States District Court
For the Northern District of California

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paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the

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corporation’s creditors solely because of a state of insolvency . . . .” Berg, 178 Cal. App. 4th at 1041.4

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The court held that “the scope of any extra-contractual duty owed by corporate directors to the insolvent

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corporation’s creditors is limited in California, consistently with the trust-fund doctrine, to the

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avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used

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to pay creditors claims. This would include acts that involve self-dealing or the preferential treatment

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of creditors.” Id. (emphasis in original). The appellate court in Berg sustained the demurrer because

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the thrust of Berg’s claim – that “the directors effected the assignment for the benefit of creditors, a

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recognized statutory alternative to liquidation through bankruptcy, rather than investigating, exploring

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or pursuing a bankruptcy reorganization through which Berg theoretically could have maximized the

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value of Pluris’s accumulated net operating losses and the other creditors could have benefitted from

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Berg’s reorganization plan,” – “do not involve self dealing or prohibited preferential treatment of

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creditors and further do not constitute the actual diversion, dissipation, or undue risking of Pluris’s

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assets that were otherwise available to pay creditors’ claims.” Id. at 1042-43 (internal citations omitted).

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Instead, “[a]t most, and contrary to Berg’s contentions on appeal, these facts allege that another course

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of action, if explored and pursued, might have offered more value in the end or that beneficial,

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maximum, or more valuable use could thereby have been made of Pluris’s net operating losses,

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Scope of duty

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Not relevant here, the Berg court also held that “there is no fiduciary duty prescribed under
California law that is owed to creditors by directors of a corporation solely by virtue of its operating in
the ‘zone’ or ‘vicinity’ of insolvency.” Berg, 178 Cal. App. 4th at 1041.
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assuming that the many contingencies required to successfully do so all would have transpired

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favorably.” Id. at 1043.

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Here, contrary to the allegations in Berg, Dollar Tree has alleged that Pau engaged in self-

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dealing and preferential treatment of creditors. Pau contends that these allegations are insufficient

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because Dollar Tree’s claim is unliquidated, unsecured, and hotly disputed, and it is undisputed that

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Comerica was the senior secured creditor whose foreclosure sale is what prompted the sale to Capella

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in the first place.5 Pau contends that his decision to pay sales proceeds to Comerica was not only proper,

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it was legally required. Pau also argues that the complaint does not allege that the other creditors of

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Toyama who were paid, including Pau, were not real creditors of Toyama.

United States District Court
For the Northern District of California

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The Court concludes that Dollar Tree has alleged facts sufficient to state a claim. The Court

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agrees with defendants that the allegations regarding the payment to Comerica, on its own, would not

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state a claim for breach of fiduciary duty. However, the complaint also alleges that Pau engaged in self-

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dealing by executing the Second Amendment on behalf of both Toyama and Capella, and paying himself

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out of the proceeds of the sale. Although the complaint does not contain detailed allegations regarding

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the payments to the other creditors, the complaint alleges that Pau made payments to other creditors and

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preferred those creditors over Dollar Tree.

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C.

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Finally, defendants contend that the breach of fiduciary duty claim is barred by the business

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judgment rule. “The [business judgment] rule establishes a presumption that directors’ decisions are

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based on sound business judgment, and it prohibits courts from interfering in business decisions made

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by the directors in good faith and in the absence of a conflict of interest.” Berg, 178 Cal. App. 4th at

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1045. In response to plaintiff’s argument that the business judgment rule does not apply because the

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complaint alleges that Pau had a conflict of interest, defendants assert that the alleged conflict “has

Business judgment rule

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5

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This point is actually disputed, though it is not alleged in the complaint. Dollar Tree asserts
– and the emails between Pau and Dollar Tree prior to the sale provide some support – that the primary
motivation for the sale was that Capella faced a February 16, 2011 deadline under Section 1031 of the
Internal Revenue Code, 26 U.S.C. § 1031, by which to purchase a property in order to defer recognition
of capital gains on an exchange of business properties. See Abramowich Decl. in Support of Opposition
to Motion to Dismiss Action ¶ 6; Pau Decl. Ex. A (emails).
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nothing to do with how creditor claims were paid.” Reply at 13:5-7. Defendants continue, “It cannot

2

be said that Mr. Pau breached his fiduciary duty or violated the Business Judgment Rule by paying other

3

creditors, including himself, before he had Toyama pay DT on its disputed and unliquidated claims.”

4

Id. at 13:21-23.

5

Defendants’ arguments lack merit. Whether Pau breached his fiduciary duty or violated the

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Business Judgment Rule is a factual question that cannot be resolved on the pleadings. The complaint

7

alleges that Pau had a conflict of interest in his dual role as manager of both Toyama and Capella, and

8

by paying himself out of the proceeds of the sale. It may be that it was proper for Pau to pay himself

9

out of those proceeds. That, however, is a question for the fact finder on summary judgment or at trial,

United States District Court
For the Northern District of California

10

and is not appropriate for resolution on a motion to dismiss under Rule 12(b)(6).

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12

CONCLUSION

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For the foregoing reasons, the Court GRANTS plaintiff’s motion for consolidation, DENIES

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defendants’ motion to dismiss 11-2696 SI, and DENIES defendants’ motion to dismiss 11-2696 SI for

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failure to state a claim. Docket No. 228 in C 10-325 SI and Docket Nos. 15 & 18 in C 11-2696 SI.

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At the Case Management Conference following the hearing on these motions, counsel discussed

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how and whether a single amended, consolidated complaint may be used for the balance of this

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litigation. The parties are directed to file an amended consolidated complaint, or alternatively, a plan

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of coordination, no later than August 12, 2011.

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IT IS SO ORDERED.

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Dated: August 1, 2011
SUSAN ILLSTON
United States District Judge

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