MH Pillars LTD et al v. Carol Realini et al

Filing 113

ORDER by Judge Hamilton denying 82 Motion to Strike; terminating 85 Motion for Sanctions without prejudice to refilling at close of case. (pjhlc1, COURT STAFF) (Filed on 9/28/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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MH PILLARS LTD, et al.,

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United States District Court
Northern District of California

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Case No. 15-cv-1383-PJH

Plaintiffs,

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v.

ORDER DENYING ANTI-SLAPP
MOTION TO STRIKE

CAROL REALINI, et al.,
Defendants.

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Defendants Carole Realini ("Realini"), Rodney Robinson ("Robinson"), Christopher

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Martin ("Martin"), Obopay, Inc. ("Obopay"), and Accelerated Commerce Solutions

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("ACS") filed the present motion seeking an order striking certain claims in the first

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amended complaint ("FAC") in this action pursuant to California's Anti-SLAPP statute,

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California Code of Civil Procedure § 425.16, to the extent those claims are based on

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defendants' act of reporting the alleged unlawful or suspicious activity of plaintiffs MH

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Pillars Inc. ("MHP-USA") and MH Pillars Ltd. ("MHP-UK") to the United States

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Department of Homeland Security (“DHS”).

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The factual and procedural background are as set forth in the September 14,

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2017, order re defendants’ motions to dismiss the FAC for failure to state a claim. See

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Doc. 109. Briefly, on March 30, 2017, after the court had dismissed the original

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complaint with leave to amend, plaintiffs filed the FAC. In the FAC, plaintiffs asserted

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four causes of action – breach of contract, quasi-contract, breach of fiduciary duty and

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constructive fraud, and fraud and deceit. The breach of contract, breach of fiduciary duty,

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and fraud claims were all pled with multiple “counts.”

On April 25 and 26, 2017, defendants filed motions to dismiss the FAC (Docs. 81,

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83), which were noticed for hearing on June 14, 2017. Also on April 26, 2017,

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defendants filed the present Anti-SLAPP motion to strike (Doc. 82). However, the parties

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subsequently stipulated to extend the briefing schedule on the Anti-SLAPP motion, with

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the result that the motions to dismiss were fully briefed and heard by the court (though

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not decided) before plaintiffs filed their opposition to the Anti-SLAPP motion.
In the September 14, 2017, order, the court dismissed all claims asserted against

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ACS, and dismissed most of the claims against the other defendants. The only claims

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remaining in the case are the claim of breach of the Option Agreement against Realini

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and Obopay, and the associated claim of breach of the implied covenant; and the first

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United States District Court
Northern District of California

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and second “counts” of the claim of fraud and deceit asserted against Realini, Martin,

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Robinson, and Obopay.
DISCUSSION

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A.

Legal Standard
California's anti-SLAPP statute permits defendants to bring a “special motion to

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strike” if a cause of action against them arises “from any act . . . in furtherance of the . . .

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right of petition or free speech under the United States Constitution or the California

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Constitution in connection with a public issue,” unless “the plaintiff has established that

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there is a probability that the plaintiff will prevail on the claim.” Cal. Code Civ. Proc.

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§ 425.16(b)(1).

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The purpose of the anti-SLAPP statute is to deter lawsuits “brought primarily to

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chill the valid exercise of the constitutional rights of freedom of speech.” Cal. Civ. Proc.

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Code § 425.16(a); see also Jordan-Benel v. Universal City Studios, Inc., 859 F.3d 1184,

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1188 (9th Cir. 2017); Metabolife Int'l, Inc. v. Wornick, 264 F.3d 832, 839 (9th Cir. 2001).

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California's anti-SLAPP protections apply to state law claims brought in federal court.

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U.S. ex rel. Newsham v. Lockheed Missiles & Space Co., 190 F.3d 963, 971-73 (9th Cir.

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1999); see also GLADD v. CNN, 742 F.3d 414, 422 (9th Cir. 2014).

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To prevail on a motion under § 425.16, the moving defendant must make a prima
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facie showing that plaintiff's suit arises from an act in furtherance of defendant's

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constitutional right to free speech or petition. Jordan-Benel, 859 F.3d at 1188. An “act in

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furtherance” includes, among other things, “conduct in furtherance of the exercise of the

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constitutional right of petition or the constitutional right of free speech in connection with a

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public issue or an issue of public interest.” Cal. Code Civ. Proc. § 425.16(e)(4).
If the defendant makes the required showing, the burden then shifts to plaintiff to

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establish a reasonable probability it will prevail on its claim in order for the claim to

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survive dismissal. Hyan v. Hummer, 825 F.3d 1043, 1045 n. 1 (9th Cir. 2016); see also

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Doe v. Gangland Prods., Inc., 730 F.3d 946, 953 (9th Cir. 2013). If the plaintiff cannot

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meet the minimal burden of “stat[ing] and substantiat[ing] a legally sufficient claim,” the

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Northern District of California

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claim is stricken pursuant to the statute. Jordan-Benel, 859 F.3d at 1188-89. A

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prevailing defendant “shall be entitled to recover his or her attorney's fees and costs.” Id.

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§ 425.16(c).

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B.

Defendants' Motion

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The claims that defendants seek to have stricken in the present motion are the

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claims for breach of fiduciary duty and fraud, and the claim against ACS for breach of

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contract, which they contend are based almost entirely on allegations that defendants

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reported suspicious activity to DHS. However, in light of the ruling in the September 14,

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2017, order, the court does not address any claims against ACS (which has been

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dismissed from the case) and also does not address the claims alleging breach of

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fiduciary duty/constructive fraud, or the third “count” of the fraud claim, alleged against

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Robinson and ACS.

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Defendants argue that both prongs of the anti-SLAPP statute are satisfied on the

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face of the FAC. With regard to the first prong, they assert that the following allegations

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in the FAC show that the fraud claims arise from an act in furtherance of defendant's

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constitutional right to free speech or petition, as set forth in § 425.166(3)(1), (4).

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"In early 2013, plaintiffs allege, Robinson, Martin, and Realini decided to

doublecross plaintiffs as a means of exiting the 2013 Transaction without repaying the
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benefits they had obtained from it.” FAC ¶ 49. “Specifically, they caused Obopay [to]

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make allegations to the Department of Homeland Security (‘DHS’) that plaintiffs were

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involved in unlawful activity. They failed to disclose to DHS that Obopay had

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contracted to provide legal compliance services and expertise." FAC ¶ 49(a).

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"Defendants failed to disclose that they had already initiated hostile action

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against plaintiffs, including the DHS allegations and private investigation, with the intent

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of reneging on the 2013 Transaction." FAC ¶ 114.

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Defendants contend that because the above allegations relate to communications
made to law enforcement (DHS), the claims should be stricken. See Comstock v. Aber,

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212 Cal. App.4th 931, 941 (2012) (citing Walter v. Kiousis, 93 Cal. App. 4th 1432, 1439

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United States District Court
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(2001)); see also ComputerXpress, Inc. v. Jackson, 93 Cal. App. 4th 993, 1009 (2001).

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They argue that the gravamen of this claim is that defendants “initiated hostile action” by

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reporting plaintiffs’ unlawful conduct to DHS and not telling plaintiffs that they had done

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so, which defendants claim is "simply the other side of the same coin." Defendants argue

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that to the extent that plaintiffs fraud claim is also based on additional, non-protected

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activities, that does not defeat the anti-SLAPP Motion.

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Defendants also assert that the statements come within the protection of

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California’s litigation privilege, codified at Civil Code § 47(b), which “bars liability in tort for

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the making of certain statements.” Hagberg v. Cal. Fed. Bank FSB, 32 Cal. 4th 350, 360

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(2004). Defendants contend that the litigation privilege is in fact co-extensive with the

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speech protected under the anti-SLAPP statute. See Healy v. Tuscany Hills Landscape

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& Rec. Corp., 137 Cal. App. 4th 1, 5 (2006). They argue that in the present action,

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plaintiffs allege, in essence, that defendants should not have reported plaintiffs’ illegal or

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suspicious activities to DHS.

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With regard to the second prong, defendants contend that plaintiffs cannot

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demonstrate a probability of prevailing on the merits, for at least two reasons. First, they

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assert, plaintiffs' claims are barred by the litigation privilege under Civil Code § 47,

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because reports of suspected criminal activity to the police are absolutely privileged even
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if they turn out to be false. See id. at 364.

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Second, defendants argue, plaintiffs’ claims fail as a matter of law. Here,

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defendants simply refer to "all of the additional reasons provided in [d]efendants'

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concurrently filed motions to dismiss." At the time they filed the present motion, they

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anticipated that the claims challenged in the motion to dismiss were likely to be

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dismissed, and argued that there was thus no reason for the court to spend time on

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determining whether plaintiffs’ factual allegations were otherwise sufficient to state a

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claim.

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In opposition, plaintiffs do not dispute that the act of reporting to law enforcement
is protected activity under the Anti-SLAPP statute, but they do contend that § 425.16

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does not apply here because the claims alleged in the FAC do not "arise" out of protected

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activity. They argue that claims arise from protected activity only if the speech or

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petitioning activity itself is the wrong being complained of in the complaint, for which

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liability is sought. In support, they cite Park v. Bd. of Trs. of Cal. State Univ., 2 Cal. 5th

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1057, 1060 (2017); and Jordan-Benel v. Universal City Studios, Inc., 859 F.3d 1184,

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1190-93 (2017).

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Here, plaintiffs assert, the referenced "protected activity" – the defendants'

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communications with law enforcement – is not subject to the anti-SLAPP statute because

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it is "just evidence and context for liability." They acknowledge that the FAC refers to the

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communications with law enforcement in the allegations in support of the fraud claims,

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but they argue that the wrongful act alleged in each of those claims is that defendants

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"induced plaintiffs to send them money under false pretenses." Thus, they assert, the

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protected activity – the communication with law enforcement – is simply evidence of the

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alleged "false pretense," in that (in their view) the act of reporting plaintiffs to law

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enforcement was so inconsistent with the stated purposes of the 2013 Transaction and

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ongoing business relationship that it is “readily inferred” that Realini would not have done

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so unless she intended to rescind the 2013 Transaction.

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In their second main argument, plaintiffs contend that their claims have merit
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within the meaning of the anti-SLAPP statute, and that only claims that arise from

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protected activity and lack minimal merit – i.e., only claims that satisfy both prongs of the

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anti-SLAPP test – are subject to being stricken under § 425.16. Plaintiffs assert that the

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FAC adequately alleges fraud against Realini, Robinson, and Martin.

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The motion is DENIED. The initial burden in an Anti-SLAPP motion is on

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defendants to show that plaintiffs' claims "arise from" protected activity. As indicated

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above, while the FAC alleges four causes of action (some with multiple “counts”) against

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defendants, the claims remaining in the case following the ruling on the motions to

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dismiss are the claim of breach of the Option Agreement against Realini and Obopay,
and the claim of breach of the implied covenant in connection with that Agreement; and

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United States District Court
Northern District of California

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the first and second “counts” of the claim of fraud and deceit asserted against the Realini,

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Martin, Robinson, and Obopay.

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Defendants do not appear to be seeking an order striking the claim of breach of

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the Option Agreement, and the associated claim of breach of the implied covenant.

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Thus, the court looks only at the first and second “counts” of the fraud claim, both of

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which are asserted by MHP-USA only. In the first “count,” MHP-USA alleges fraudulent

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inducement against Martin and Obopay, in connection with March 2012 Agent

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Agreement. In the second “count,” MHP-USA alleges fraudulent inducement against

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Realini, Robinson, and Martin, in connection with the March 2013 transfer of $4 million in

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customer funds.

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The only references to protected statements that do not apply to dismissed claims

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are the allegations in FAC ¶ 49, 49(a) ("Facts" section) and in FAC ¶ 114 (claim of fraud

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against Realini, Robertson, and Martin). Both have to do with defendants’ alleged intent

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to renege on the 2013 Transaction. None have to do with the circumstances surrounding

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the formation of the 2012 Agent Agreement (first “count” of the fraud claim). Thus, that

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leaves only the second “count” of the fraud claim, which defendants contend is based, at

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least in part, on defendants’ alleged “fail[ure] to disclose that they had already initiated

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hostile action against plaintiffs, including the DHS allegations . . . .” FAC ¶ 114.
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In the second “count” of the fraud claim, plaintiffs allege that
[o]n March 28, 2013, at the Obopay/Payza Compliance
Committee Meeting, Realini, Robinson, and Martin
fraudulently induced plaintiffs to transfer $4.1 million to their
control at Obopay. They did so by representing to Firoz and
Ferhan Patel, among others, that they had made the
determination that [the] existing Obopay agency program was
non-compliant; that Obopay needed custody and control of an
amount equal to U.S. client fund[s] in Obopay/Payza customer
accounts for MTL-compliance purposes; but that this issue
could be resolved through MHP-USA's transfer of the fund[s]
and provision of daily customer balance reports to Obopay.
These representations were intentionally false because the
defendants did not really intend to resolve any compliance
issues.
FAC ¶¶ 112-114. Plaintiffs allege further that "[d]efendants failed to disclose that they

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had already initiated hostile action against plaintiffs, including the DHS allegations and
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private investigation, with the intent of reneging on the 2013 Transaction." FAC ¶ 114.
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However, that last allegation does not support the gravamen of the fraud claim, which is
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that defendants fraudulently induced plaintiffs to transfer $4.1 million to Obopay.
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The gravamen of an action is “the allegedly wrongful and injury-producing conduct
that provides the foundation for the claims.” JordanBenel, 859 F.3d at 1190. The

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elements of a claim of fraud are (a) misrepresentation (false representation,
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concealment, or nondisclosure); (b) knowledge of falsity; (c) intent to induce reliance;
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(d) justifiable reliance; and (e) resulting damage. Lazar v. Sup. Court, 12 Cal. 4th 631,
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638 (1996). Fraud in the inducement is a subset of fraud, occurring when “the promisor

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knows what he is signing but his consent is induced by fraud, mutual assent is present
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and a contract is formed, which by reason of the fraud, is voidable.” Hinesley v.

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Oakshade Town Ctr., 135 Cal. App. 4th 289, 294-95 (2005) (citations omitted).
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The fraud claim against Realini, Robinson, and Martin (second “count”) does not

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arise from protected activity, but rather is an affirmative fraud claim based on defendants'
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alleged misrepresentations on March 28, 2013, that the $4 million transfer would solve
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certain compliance issues, which misrepresentations allegedly induced plaintiffs to
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transfer $4 million to Obopay on April 10, 2013. The allegation that defendants had
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"failed to disclose" that they had already initiated hostile action against plaintiffs –

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including reporting them to the DHS – is mere surplusage which is not an essential

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element of the claim of fraud.

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Here, the court found in the September 14, 2017, order that plaintiffs could

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proceed with the second “count” in the claim of fraud, alleged against Realini, Robinson,

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Martin, and Obopay in connection with the $4 million transfer to Obopay. While the claim

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may not be able to survive summary judgment, the court found it inappropriate for

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decision on a Rule 12(b)(6) motion.
In addition, while it is true, as the court found in the September 14, 2017, order,

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that any claim based on reporting to law enforcement would be barred by the litigation

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privilege, the court finds that the fraud claims are not based on reporting to law

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enforcement, for the same reason that the allegations regarding reporting to DHS do not

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themselves support the fraud claim. At most, one could say that those allegations are

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irrelevant to the surviving claims in this case.

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At this point, for the reasons discussed in the June 30, 2017, order, it is not

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possible to determine whether there is a reasonable probability that plaintiffs will prevail

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on the fraud claim. As the order indicates, plaintiffs have survived defendants’ motion to

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dismiss for failure to state a claim, but the existence of factual issues precludes a

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determination that plaintiffs are likely to prevail.
CONCLUSION

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In accordance with the foregoing, defendants’ Anti-SLAPP motion is DENIED.

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IT IS SO ORDERED.

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Dated: September 28, 2017

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__________________________________
PHYLLIS J. HAMILTON
United States District Judge

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