Graebner et al v. James et al
Filing
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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS AND VACATING HEARING by Judge William Alsup [granting in part and denying in part 33 Motion to Dismiss]. (whasec, COURT STAFF) (Filed on 12/11/2012)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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For the Northern District of California
United States District Court
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E. BERTITA TRABERT GRAEBNER, individually
and as Trustee of the El Nora L. Trabert Irrevocable
Trust; TALLIE R. TRABERT, individually and as
Trustee of the El Nora L. Trabert Irrevocable Trust;
T. VERNON TRABERT, individually and as
Trustee of the El Nora L. Trabert Irrevocable Trust,
Plaintiffs,
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No. C 12-01694 WHA
ORDER GRANTING
IN PART AND DENYING
IN PART DEFENDANTS’
MOTION TO DISMISS
AND VACATING
HEARING
v.
MICHAEL E. JAMES, an individual; MNM
PROPERTIES, LLC, a foreign limited liability
company, WM. PAGE & ASSOCIATES, INC.,
a foreign corporation; WILLIAM SCOTT PAGE,
an individual, and Does 1-50, inclusive,
Defendants.
/
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INTRODUCTION
In this investment fraud dispute, defendants move to dismiss pursuant to Rule 12(b)(6).
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For the reasons stated below, the motion is GRANTED IN PART AND DENIED IN PART.
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The hearing scheduled for December 20, 2012, is VACATED.
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STATEMENT
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Plaintiffs are the adult children and co-trustees of a family trust. Plaintiffs’ lawyer,
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defendant Michael James, talked them into investing the proceeds from their mother’s life
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insurance policies into “viatical life insurance contracts,” which are devices whereby the owner
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of a life insurance policy sells his or her expectancy in an eventual death benefit in order to raise
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cash to pay for immediate needs such as medical treatment. Attorney James made arrangements
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with defendant broker Wm. Page & Associates, Inc., doing business as The Lifeline, who sold
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plaintiffs three viatical contracts. Plaintiffs received the death benefits from one of the viatical
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contracts. Plaintiffs have yet to receive the death benefits from the other two contracts as the
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viators have lived longer than expected due to great improvements in AIDS medication. As a
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result, plaintiffs have had to pay premiums to keep at least one of the viatical contracts in force
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(First Amd. Compl. ¶¶ 20, 25, 28, 57).
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Plaintiffs allege that Lifeline and Attorney James made numerous misrepresentations
regarding the viatical contracts. The gravamen of the allegations are that defendants
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misrepresented the risks of the viatical contracts and provided inaccurate life expectancy
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estimates. Plaintiffs also allege that Attorney James is an agent and representative of Lifeline
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and that James received a secret commission for the transactions. Plaintiffs seek to hold Lifeline
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liable for Attorney James’ alleged misrepresentations in selling the viatical contracts (First Amd.
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Compl. ¶¶ 40–43).
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Plaintiffs allege the following claims: (1) breach of fiduciary duty, (2) intentional
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misrepresentation, (3) negligent misrepresentation, (4) false promise and (5) fraud by omission.
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Defendants now move to dismiss for failure to state a claim and assert that the statute of
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limitations bars all claims.
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ANALYSIS
A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged
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in the complaint. Parks Sch. of Business v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995).
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All material allegations of the complaint are taken as true and construed in the light most
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favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 340 (9th Cir.
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1996). A complaint, on its face, needs to be plausible, meaning that “the plaintiff [must] plead[]
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factual content that allows the court to draw the reasonable inference that the defendant is liable
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for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). This “requires more
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than labels and conclusions, and a formulaic recitation of the elements of a cause of action will
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not do. Factual allegations must be enough to raise a right to relief above the speculative level.”
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Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations omitted).
OBJECTION TO DEFENDANTS’ UNTIMELY REPLY BRIEF.
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1.
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Plaintiffs move to strike defendants’ reply brief for untimeliness. Pursuant to Local
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Rule 7-3(c) the reply to an opposition must be filed seven days after the opposition was due.
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Plaintiffs’ opposition was due on November 5. Defendants’ reply brief was therefore due
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on November 12. Defendants did not file its reply brief until November 22, ten days late.
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Defendants also did not provide an explanation for its failure to comply with the Local Rules.
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Accordingly, defendants’ reply brief is STRICKEN.
2.
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“When ruling on a Rule 12(b)(6) motion to dismiss, if a district court considers evidence
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outside the pleadings, it must normally convert the [Rule] 12(b)(6) motion into a Rule 56 motion
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for summary judgment, and it must give the nonmoving party an opportunity to respond.”
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United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). Our court of appeals has held,
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however, that a court may “consider certain materials — documents attached to the complaint,
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documents incorporated by reference in the complaint, or matters of judicial notice — without
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converting the motion to dismiss into a motion for summary judgment.” Id. at 908. A document
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not attached to a complaint “may be incorporated by reference into a complaint if the plaintiff
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refers extensively to the document or the document forms the basis of the plaintiff’s claim.”
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Ibid.
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CONSIDERATION OF THE PURCHASE AGREEMENTS.
The parties executed three purchase agreements for the sale of three viatical insurance
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contracts. Two of the viatical insurance contracts are at issue in this action. Defendants request
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that the purchase agreements be consider in the motion to dismiss. This is problematic for two
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reasons. First, plaintiffs do not refer to these contracts in their complaint. In fact, defendants
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admit that the contracts are only indirectly referenced through the purchase of the life insurance
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policies (Br. 14). Also, plaintiffs do not rely on the contracts to form the basis for their fraud
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claims. Their claims are premised on misrepresentations made by Attorney James who was
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both their lawyer and a representative of Lifeline.
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Second, even if the purchase agreements were considered under the rule of incorporation,
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the purchase agreements are of little value at this stage in the litigation. As plaintiffs correctly
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point out, and as previously recognized by an earlier order (Dkt. No. 16), the contracts may not
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be valid because Lifeline did not sign them. Also, it is unclear whether plaintiffs knew what they
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were agreeing to because plaintiffs may have relied on their lawyer James, who was on both
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sides of the transaction. The potential invalidity of these contracts significantly calls into
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question their probative value and use at this stage of the litigation. Accordingly, this order does
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not consider the purchase agreements.
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FAILURE TO STATE A CLAIM.
A.
Breach of Fiduciary Duty.
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3.
The elements for breach of fiduciary duty are: “(1) existence of a fiduciary duty;
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(2) breach of the fiduciary duty; and (3) damage proximately caused by the breach.” Slovensky
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v. Friedman, 142 Cal. App. 4th 1518, 1534 (2006).
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Plaintiffs allege that James was a fiduciary through his roles as an attorney and financial
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advisor. Plaintiffs also allege that Attorney James was “an authorized representative and agent
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of . . . [Lifeline]. Consequently . . . [Lifeline] is liable, to the same extent as . . . [James, for
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James’] breaches of fiduciary duty alleged herein” (First Amd. Compl. ¶ 40).
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With regard to Attorney James, plaintiffs have properly alleged that James breached
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fiduciary duties by being on both sides of the transactions and fraudulently misrepresenting
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the risks of the transactions. This in turn is alleged to have caused damages when the policies
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did not pay out as expected. Accordingly, plaintiffs have stated a proper claim for breach of
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fiduciary duty as to Attorney James.
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With regard to Lifeline, plaintiffs have properly pled that Attorney James is an agent
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and representative for Lifeline. Attorney James signed the contracts as a representative and
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is alleged to have received a secret commission from Lifeline (Dkt. No. 16 at 2). These facts
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are sufficient to support the allegation that a principal-agent relationship existed among
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Attorney James and Lifeline.
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Plaintiffs, however, have not pled a plausible claim that Attorney James was acting
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within the scope of the agency relationship to create liability for an alleged breach of fiduciary
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duty. Plaintiffs have not pled facts that support an inference that James’ roles as an attorney
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and financial advisor to plaintiffs was within the scope of the agency relationship. Accordingly,
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plaintiffs have not stated a plausible claim for agency liability as to Lifeline for breach of
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fiduciary duty. As a result, this claim as to Lifeline is DISMISSED.
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B.
Fraud Claims.
Plaintiffs allege the following claims for fraud: intentional misrepresentation, negligent
misrepresentation, false promise, and fraud by omission. The elements of fraud in California
are: “(1) a misrepresentation (false representation, concealment, or nondisclosure); (2)
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knowledge of falsity (or scienter); (3) intent to defraud, i.e., to induce reliance; (4) justifiable
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reliance; and (5) resulting damage.” Robinson Helicopter Co. v. Dana Co., Inc., 34 Cal. 4th 979,
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990 (2004).
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Additionally, Rule 9(b) requires that in all averments of fraud the circumstances
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constituting fraud must be stated with particularity. Malice, intent, knowledge, and other
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conditions of a person’s mind may be alleged generally. “Averments of fraud must be
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accompanied by ‘the who, what, when, where, and how’ of the misconduct charged.” Vess v.
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Ciba–Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (citation omitted). Rule 9(b)
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serves to give defendants notice of the specific fraudulent conduct against which they must
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defend. Bly–Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001).
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(i)
Intentional and Negligent Misrepresentation Claims.
Defendants contend that plaintiffs have not met the heightened pleading standard
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of Rule 9(b). This order disagrees. Plaintiffs allege that on or about 2002, Attorney James
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“represented to the plaintiffs that the only risk that they would incur, if they purchased the
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viatical contracts . . . was that their annual rate of return might be reduced if the viators
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lived past their projected demise dates, which . . . was very unlikely.” Attorney James further
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represented that this risk was extremely remote because the estimates regarding viators’ life
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expectancies were highly reliable. Plaintiffs also allege that the misrepresentations by
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Attorney James were made at in-person meetings held in Chicago (First Amd. Compl. ¶¶ 76, 81).
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Plaintiffs’ have met the heightened pleading standard for this claim.
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Lifeline argues that the only allegations against it involves a brochure that (1) plaintiffs
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allege only to have received and not to have read and (2) the representations in the brochure
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are contradicted by the merger clause in the purchase agreements. Lifeline also argues that all
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representations made by Attorney James, the purported agent of Lifeline, are rebutted by and
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inconsistent with the purchase agreements.
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While defendants are correct that plaintiffs’ receipt of the brochure is insufficient by
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itself to create liability, plaintiffs have alleged various misrepresentations by James who was
both their lawyer and Lifeline’s agent. It is plausible that if Attorney James was a representative
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of Lifeline and was paid a commission to sell Lifeline’s services, then misrepresentations made
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by James to close the deal were made within the scope of the agency relationship and actionable
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against Lifeline. Furthermore, as stated previously, defendants’ reliance on potentially invalid
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contracts will not carry the day at the pleading stage. Thus this argument fails.
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Defendants also argue that plaintiffs have not properly alleged damages because the
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policies have not yet lapsed. Not so. Plaintiffs have had their money tied up for years in
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these investments, causing them to forego interest in other investments and causing them
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to pay premiums to keep at least one policy in force. Thus plaintiffs have properly alleged
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damages.
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Accordingly, plaintiffs have stated a proper claim for misrepresentation against
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Attorney James and Lifeline through an agency relationship. As a result, defendants’ motion
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to dismiss the intentional and negligent misrepresentation claims is DENIED.
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(ii)
False Promise.
A claim for false promise requires that “the promisor did not intend to perform at the
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time he or she made the promise and that it was intended to deceive or induce the promisee to
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do or not do a particular thing.” Tarmann v. State Farm Mut. Auto. Ins. Co., 2 Cal. App. 4th
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153, 159 (1991). Plaintiffs’ claim for false promise is that defendants misrepresented the risks of
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the viatical contracts and their profitability (First Amd. Compl. ¶¶ 105–06). These are not false
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promises, but instead are alleged false representations. Plaintiffs’ false promise claim is clearly
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duplicative and thus there is no need to re-plead. Accordingly, this claim is DISMISSED WITH
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PREJUDICE.
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Fraud by Omission.
“There are four circumstances in which nondisclosure or concealment may constitute
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actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff;
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(2) when the defendant had exclusive knowledge of material facts not known to the plaintiff;
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(3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the
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defendant makes partial representations but also suppresses some material facts.” LiMandri v.
Judkins, 52 Cal. App. 4th 326, 337 (1997). Additionally, a fraud by omission claim is not
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required to meet the heightened pleading standard under Rule 9(b). Falk v. Gen. Motors Corp.,
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496 F. Supp. 2d 1088, 1099 (N.D. Cal. 2007) (Alsup, J.).
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Plaintiffs allege that defendants had exclusive knowledge of material facts and that
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defendants made partial representations and suppressed and concealed some material facts (First
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Amd. ¶¶ 121–22). Defendants contend that none of the alleged omissions were material matters
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or alternatively, that the purchase agreements made the necessary disclosures. Plaintiffs allege
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that defendants failed to disclose the true risks of investing in the viatical insurance policies
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and failed to disclose the inaccuracies of the life expectancy projections. This is sufficient to
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state a plausible claim for fraud by omission. The materiality of the omissions are a question
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of fact. Moreover, as previously discussed, defendants cannot shield themselves with the
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potentially invalid purchase agreements. Accordingly, defendants’ motion to dismiss this claim
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is DENIED.
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4.
STATUTES OF LIMITATIONS.
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Time Period.
In California the statute of limitations is three years for a fraud or intentional
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misrepresentation claim and two years for a negligent misrepresentation claim. Hydro-Mill Co.,
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Inc. v. Hayward, Tilton & Rolapp Ins. Assocs., Inc., 115 Cal. App. 4th 1145, 1155 (2004).
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The parties disagree as to the statute of limitations for breach of fiduciary duty.
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“To determine the statute of limitations which applies to a cause of action it is necessary
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to identify the nature of the cause of action, i.e., the gravamen of the cause of action . . . .”
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Hydro-Mill, 115 Cal. App. 4th at 1153. “Where the gravamen of the complaint is that
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defendant’s acts constituted actual or constructive fraud, the applicable statute of limitations
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is the . . . [three-year] limitations period, governing fraud even though the cause of action is
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designated by the plaintiff as a claim for breach of fiduciary duty.” Thomson v. Canyon, 198
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Cal. App. 4th 594, 607 (2011) (internal quotations omitted). This order finds that the gravamen
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of the breach of fiduciary duty claim is the purported fraudulent misrepresentations made
regarding the transactions. Accordingly, this order applies the three-year statute of limitations
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for fraud to the breach of fiduciary duty claim.
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B.
Timeliness of Claims.
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Defendants argue that the statute of limitations bars all of plaintiffs’ claims. Plaintiffs
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argue that the statute of limitations did not run because Attorney James is a fiduciary and thus
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actual knowledge is required. Plaintiffs also argue that the statute of limitations was tolled by
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defendants’ reassurances and that plaintiffs did not suspect the fraud until 2011.
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Plaintiffs contend that defendants’ reassurances lulled them into failing to take action
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sooner. Plaintiffs allege that after the insurance policies did not pay out, Attorney James
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reassured plaintiffs that everything was fine and that the contracts would pay off in due time.
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Plaintiffs also allege that when they requested information about the medical statuses of the
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viators, Lifeline had falsely told plaintiffs that the law prevented it from providing this
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information. Plaintiffs further allege that they did not suspect the fraud until 2011 when Lifeline
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requested that premium payments be made directly to it instead of sending the payments to a
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third party escrow company as plaintiffs had done before. Plaintiffs worried that the premiums
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were going to be used for Lifeline’s personal benefit (First Amd. Compl. ¶¶ 59, 60, 66, 73).
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This order finds that the facts are too unclear to support a statute of limitations challenge
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at this stage in the litigation. Plaintiffs have stated a plausible claim that the statute of limitations
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should be tolled. It is better to assess the statute of limitations challenge when the facts are more
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clearly known. Defendants may reassert this argument at summary judgment. Accordingly, the
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statute of limitations challenge is DENIED WITHOUT PREJUDICE.
PUNITIVE DAMAGES.
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5.
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Defendants contend that plaintiffs’ request for punitive damages is inadequately pled.
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This order disagrees. Defendants contend that plaintiffs have not met the pleading standard
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mandated by California Civil Code Section 3294. In federal court, while Section 3294 governs
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the substantive standard to obtain punitive damages for state law claims, the Federal Rules of
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Civil Procedure governs the pleading standard. A plaintiff’s short and plain request for punitive
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damages that is supported by plausible allegations is therefore sufficient. Accordingly,
defendants’ motion to strike plaintiffs’ prayer for punitive damages is DENIED.
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CONCLUSION
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For the reasons mentioned above, defendants’ motion to dismiss is GRANTED IN PART
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AND
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of this motion. The pleading stage needs to come to a close and thus no re-pleading shall be
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permitted. The hearing scheduled for December 20, 2012, is VACATED.
DENIED IN PART. This order also notes that plaintiffs’ counsel has delayed the presentation
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IT IS SO ORDERED.
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Dated: December 11, 2012.
WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE
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