Reality Kats, LLC et al v. Mirsyl, Inc., et al

Filing 57

ORDER DENYING PLAINTIFFS MOTION TO DISMISS ACTION WITHOUT PREJUDICE AND GRANTING DEFENDANTS MOTION FOR SUMMARY JUDGMENT by Judge Claudia Wilken. (dtmS, COURT STAFF) (Filed on 3/29/2018)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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REALITY KATS, LLC, et al.,

Case No. 16-cv-06957-CW

Plaintiffs,

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ORDER DENYING PLAINTIFFS’
MOTION TO DISMISS ACTION
WITHOUT PREJUDICE AND
GRANTING DEFENDANTS’ MOTION
FOR SUMMARY JUDGMENT

v.

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MIRSYL, INC., et al.,

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Defendants.

(Dkt. Nos. 43, 45)

United States District Court
Northern District of California

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Before the Court are two dispositive motions.

On January

29, 2018, Plaintiffs Reality Kats, LLC and Dennis Simpson moved
to dismiss this action voluntarily, without prejudice, pursuant
to Federal Rule of Civil Procedure 41(a)(2).

Defendants Mirsyl,

Inc., David P. Lennon, and Novato Development, LLC oppose this
motion.

On February 8, 2018, Defendants moved for summary

judgment against Plaintiffs.

Plaintiffs filed an opposition to

this motion and Defendants filed a reply.

On March 27, 2018, the

parties appeared for a hearing on these motions.

Having

considered the papers and the arguments of counsel, the Court
DENIES Plaintiffs’ motion to dismiss this action without
prejudice and GRANTS Defendants’ motion for summary judgment.

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BACKGROUND

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I.

Sale of Novato Development
Reality Kats is a limited liability company engaged in real

estate development.

Declaration of David P. Lennon (Lennon

Decl.) ¶ 3; see also id., Ex. C at 16:1-25.
manager of Reality Kats.

Id.

Simpson is the

Novato Development is a real estate development company

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which owns a residential development project in Novato,

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California.

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Development and were partners in several other businesses.

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¶ 5.

Id. ¶ 2.

Simpson and Jeffrey Hoyal owned Novato
Id.

In 2015, Simpson and Hoyal’s relationship fell apart.

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¶ 6.

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Id.

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Northern District of California

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$3 million.

Id.; see also Lennon Decl., Ex. D (Purchase

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Agreement).

At that time, Reality Kats owned forty-three

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percent of Novato Development, Simpson owned seven percent,

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and Crater Lake Trust (a trust with Hoyal as trustee) owned

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fifty percent.

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Mirsyl to purchase Novato Development from Reality Kats,

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Simpson, and Crater Lake Trust.

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Because Lennon had previously represented Simpson, Reality

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Kats, Hoyal, Crater Lake Trust, and Novato Development as their

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attorney, Lennon advised them orally and in writing that he could

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not act as their attorney in conjunction with the sale of Novato

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Development.

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Simpson and Hoyal stating:

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Id.

They agreed to dissolve their various joint ventures.
They decided to sell Novato Development to Lennon for

Purchase Agreement at 1.

Lennon formed

Lennon Decl. ¶ 9.

On November 2, 2015, Lennon sent an email to

As I have already advised, since I have previously
represented both of you personally as your attorney, as
well as the various owners of Novato Development and
Novato Development itself, I cannot act as your
attorneys in connection with this transaction.
Accordingly, it is necessary for each of you to have
your own attorneys review and approve these documents
on your behalf.
Lennon Decl., Ex. F (11/2/15 Letter).

Plaintiffs in fact engaged

William J. Braun, Esq. to represent them in the sale of Novato

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Development.

Lennon Decl., Exs. G and H.1

On or about November 5, 2015, the parties executed the sale,

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which was memorialized in a Purchase Agreement.

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also Purchase Agreement at 1.

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executing a promissory note in the amount of that price, payable

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in monthly installments to Reality Kats.

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also id., Ex. I (Promissory Note) at 2.

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sale of Novato Development, Reality Kats also extended a $500,000

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United States District Court
Northern District of California

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Id. ¶ 10; see

line of credit to Mirsyl, by way of promissory note, to

Mirsyl paid the purchase price by

Lennon Decl. ¶ 11, see
In conjunction with the

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facilitate further development of the property, which was

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executed as a promissory note.

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Promissory Note at 1.

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ownership interest in Novato Development as collateral, as

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governed by a Pledge Agreement.

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Agreement).

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II.

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Lennon Decl. ¶ 12, see also

Both promissory notes used Mirsyl’s

Lennon Decl., Ex. J (Pledge

This Lawsuit
On November 2, 2016, Plaintiff filed this suit in Marin

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Superior Court, alleging claims for: (1) fraud; (2) legal

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malpractice - constructive fraud; (3) legal malpractice - dual

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representation of adverse interests; (4) breach of fiduciary duty

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arising out of the attorney-client relationship; (5) member’s

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derivative action; and (6) restitution/constructive

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trust/equitable lien.

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Plaintiffs filed a notice of pending action with the Marin County

Docket No. 1., Ex. A.

At the same time,

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Hoyal, who is not a plaintiff, decided to represent himself
in the transaction because he had an LLM in tax. See Declaration
of David P. Lennon in Support of Opposition to Motion to Dismiss
(Lennon Opp. Decl.) ¶ 11. Hoyal executed an acknowledgment that
he had been strongly advised not to do so and that Lennon did not
represent him or his entities in the transaction. Id., Ex. G.
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clerk, creating a cloud on Novato Development’s title.

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Opp. Decl., Ex. K.

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action to federal court.

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Lennon

On December 2, 2016, Defendants removed this
Docket No. 1.
LEGAL STANDARD

III. Federal Rule of Civil Procedure 41(a)(2)
Under Federal Rule of Civil Procedure 41(a)(1), a plaintiff
“may dismiss an action without a court order by filing: (i) a

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notice of dismissal before the opposing party serves either an

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United States District Court
Northern District of California

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answer or a motion for summary judgment; or (ii) a stipulation of

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dismissal signed by all parties who have appeared.”

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plaintiff must seek a court order dismissing an action “on terms

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that the court considers proper.”

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a defendant has pleaded a counterclaim before being served with

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the plaintiff’s motion to dismiss, the action may be dismissed

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over the defendant's objection only if the counterclaim can

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remain pending for independent adjudication.”

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Otherwise, a

Fed. R. Civ. P. 41(a)(2).

“If

Id.

“In ruling on a motion for voluntary dismissal, the District

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Court must consider whether the defendant will suffer some plain

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legal prejudice as a result of the dismissal.”

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Firestone Tire & Rubber Co., 679 F.2d 143, 145 (9th Cir. 1982).

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The decision of whether to grant a voluntary dismissal is

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“addressed to the sound discretion of the district court.”

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Plain legal prejudice does not necessarily result simply because

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a defendant faces the prospect of a second lawsuit or a plaintiff

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gains some tactical advantage.

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considered in determining whether there is legal prejudice

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include: whether “it would be inequitable or prejudicial to

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defendant to allow plaintiff to refile the action,” whether

Id.

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Hamilton v.

Factors that may be

Id.

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“plaintiff waited until the defendant is on the verge of triumph

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to move for a Rule 41(a)(2) dismissal,” “the defendant's effort

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and expense in preparing for trial,” “excessive delay and lack of

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diligence on the part of the plaintiff in prosecuting the

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action,” and “insufficient explanation of the need to take a

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dismissal.”

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538, 540 (N.D. Cal. 2005).

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IV.

United States District Court
Northern District of California

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Williams v. Peralta Cmty. Coll. Dist., 227 F.R.D.

Federal Rule of Civil Procedure 56
Summary judgment is properly granted when no genuine and

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disputed issues of material fact remain, and when, viewing the

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evidence most favorably to the non-moving party, the movant is

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clearly entitled to prevail as a matter of law.

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56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

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Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

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1987).

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Fed. R. Civ. P.

The moving party bears the burden of showing that there is

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no material factual dispute.

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true the opposing party’s evidence, if supported by affidavits or

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other evidentiary material.

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815 F.2d at 1289.

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in favor of the party against whom summary judgment is sought.

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Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

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587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952

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F.2d 1551, 1558 (9th Cir. 1991).

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Therefore, the court must regard as

Celotex, 477 U.S. at 324; Eisenberg,

The court must draw all reasonable inferences

Material facts which would preclude entry of summary

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judgment are those which, under applicable substantive law, may

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affect the outcome of the case.

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identify which facts are material.

The substantive law will

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Anderson v. Liberty Lobby,

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Inc., 477 U.S. 242, 248 (1986).
Where the moving party does not bear the burden of proof on

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an issue at trial, the moving party may discharge its burden of

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production by either of two methods:

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Northern District of California

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The moving party may produce evidence negating an
essential element of the nonmoving party’s case, or,
after suitable discovery, the moving party may show
that the nonmoving party does not have enough evidence
of an essential element of its claim or defense to
carry its ultimate burden of persuasion at trial.
Nissan Fire & Marine Ins. Co., Ltd., v. Fritz Cos., Inc., 210
F.3d 1099, 1106 (9th Cir. 2000).
If the moving party discharges its burden by showing an
absence of evidence to support an essential element of a claim or
defense, it is not required to produce evidence showing the
absence of a material fact on such issues, or to support its
motion with evidence negating the non-moving party’s claim.

Id.;

see also Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 885 (1990);
Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991).
If the moving party shows an absence of evidence to support the
non-moving party’s case, the burden then shifts to the non-moving
party to produce “specific evidence, through affidavits or
admissible discovery material, to show that the dispute exists.”
Bhan, 929 F.2d at 1409.
If the moving party discharges its burden by negating an
essential element of the non-moving party’s claim or defense, it
must produce affirmative evidence of such negation.
F.3d at 1105.

Nissan, 210

If the moving party produces such evidence, the

burden then shifts to the non-moving party to produce specific
evidence to show that a dispute of material fact exists.

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Id.

If the moving party does not meet its initial burden of

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production by either method, the non-moving party is under no

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obligation to offer any evidence in support of its opposition.

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Id.

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ultimate burden of persuasion at trial.

This is true even though the non-moving party bears the

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Northern District of California

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Id. at 1107.

DISCUSSION
I.

Motion to Dismiss Without Prejudice
Plaintiffs move for a court order authorizing voluntary

dismissal of their suit, alleging that they wish to consolidate

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this suit with another litigation pending against Lennon and

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Hoyal in the state of Oregon.

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that, because the events that gave rise to the instant action and

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the Oregon action all took place in Oregon, and most of the

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witnesses and attorneys reside in Oregon, “it promotes judicial

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efficiency and reduces the burden on all parties to have all

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claims between Plaintiffs,” Lennon and Hoyal “adjudicated in a

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single proceeding in Oregon.”

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the case information of the Oregon state court action in their

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papers.

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counsel of record in the Oregon state court action and was not

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familiar with the any of the details of the Oregon state court

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action, such as the case title, case number, parties involved,

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claims implicated, or case status.

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Motion at 4.

Id.

Plaintiffs argue

Plaintiffs did not provide

At the hearing, Plaintiffs’ counsel stated he was not

Defendants point out that there is no Oregon state court

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action brought by Plaintiffs against Defendants that is currently

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pending.

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Plaintiffs filed their motion to dismiss, Plaintiffs voluntarily

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dismissed what appears to be the only Oregon state court action

In fact, on January 29, 2018, the same day that

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that was pending against Lennon at that time.2

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LLC v. David Lennon, Jody Lennon, Case No. 17CV05360 (Jackson

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Sup. Ct. Feb. 7, 2017) (Oregon state court action).

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shows that Plaintiffs voluntarily dismissed the action without

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prejudice on the eve of trial, which was scheduled for February

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13, 2018, and while motions for summary judgment, sanctions, and

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abatement were pending.

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to consolidate this action with the Oregon state court action and

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Northern District of California

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thus have not shown sufficient reason for dismissal without

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prejudice.

See Reality Kats

The docket

Plaintiffs misrepresented their intent

Williams, 227 F.R.D. at 540.

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Over the course of nine months, Plaintiffs commenced five

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different proceedings against Lennon, in four different forums

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and three different states, many involving the same set of facts

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asserted here.

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these proceedings, such as a complaint with the Oregon state bar

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regarding the same facts alleged here, were resolved in

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Defendants’ favor, while others, such as the Oregon state court

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action, were voluntarily dismissed by Plaintiffs.

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to Dismiss (MTD) at 8-13; Lennon Opp. Decl., Ex. N (Oregon state

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bar decision).

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“campaign of frivolous litigation,” not because they want

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adjudication on the merits, but because they want to litigate

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Defendants into the ground so that they will default on their

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promissory notes and return the properties purchased, without a

Id. ¶¶ 17, 30.

Defendants allege that some of

Opp. to Motion

Defendants allege that Plaintiffs brought this

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In Defendants’ Updated Case Management Statement,
Defendants provide information for a number of cases brought by
Plaintiffs, including Premier Trust of Nevada, Inc. and Simpson
v. Hoyal, Case No. 17CV21456 (Jackson Sup. Ct. May 25, 2017), an
Oregon state court action that is still pending. Defendants are
not parties to that case, however.
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fight.

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Simpson’s CPA to Simpson speculating that Lennon might not have

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“very much money to fight a lawsuit unless they sell assets” and

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that he “might just return ownership to Novato to you without a

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fight”).

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Opp. to MTD at 2-3; Lennon Opp. Decl., Ex. T (email from

There is also evidence that Plaintiffs filed for voluntary
dismissal in this case to avoid an adverse ruling.

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v. Assurity Financial Services, LLC, et al., Case No. 15-cv-4526-

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United States District Court
Northern District of California

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See Batuhan

WHO, Docket No. 50 (a court “may consider whether the plaintiff

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is requesting a voluntary dismissal only to avoid a near-certain

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adverse ruling.”).

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Plaintiffs asking them to confirm that they are “no longer

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advocating in this action that [Lennon] represented plaintiffs in

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connection with the Novato Development transaction.”

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Decl., Ex. P at 1.

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several times.

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stated that they “expect[ed] to apply to dismiss the pending

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action without prejudice.”

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again but received no response.

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Defendants emailed Plaintiffs stating that the summary judgment

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deadline was imminent and that they intended to move for summary

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judgment on all of Plaintiffs’ claims related to the issue of

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Lennon’s alleged representation of Plaintiffs in connection with

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the Novato Development transaction.

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2018, Plaintiffs stated that they were authorized to file a

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motion to dismiss without prejudice.

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January 29, 2018, Plaintiffs filed their motion to dismiss,

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asserting falsely that they intended to join their claims here

On January 11, 2018, Defendants emailed

Lennon Opp.

Defendants followed up on this request

Id. at 2-5.

On January 16, 2018, Plaintiffs

Id. at 6.
Id.

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Defendants followed up
On January 24, 2018,

Id. at 10.

Id.

On January 26,

A few days later, on

with the Oregon state court action.

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indicates that they began considering voluntary dismissal of this

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action only after Defendants indicated that they intended to move

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for summary judgment on an issue they do not dispute, that Lennon

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did not actually represent Plaintiffs in connection with the

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Novato Development transaction.3

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Plaintiffs again to avoid adjudication on the merits of their

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claim and enable them to bring another action against Defendants

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United States District Court
Northern District of California

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Plaintiffs’ correspondence

in another forum.

Thus, dismissal would allow

In sum, because several factors demonstrate that Defendants

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will suffer legal prejudice if this action is voluntarily

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dismissed, Plaintiffs’ motion must be denied.

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Court proceeds to consider the merits of Defendants’ motion for

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summary judgment.

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II.

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Accordingly, the

Motion for Summary Judgment
Plaintiffs fail completely to rebut the substantive

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arguments of Defendants’ motion for summary judgment.

Instead,

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they concede what they call the “single factual premise” of

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Defendants’ motion -- “that Plaintiffs were not represented by

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Defendant David Lennon in the sale of Novato Development” -- and

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advocate that the Court enter partial summary judgment on this

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limited issue rather than on the entirety of Plaintiffs’ claims.

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Opp. to Motion for Summary Judgment (MSJ) at 2.

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request that the order “specifically preserve claims not

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currently pled in the California action and specifically preserve

Plaintiffs

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At the hearing, Plaintiffs’ counsel confirmed that he had
known that Defendants did not represent Plaintiffs in connection
with the Novato Development sale since the parties attended
mediation in August 2017.
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claims that may be brought in the Oregon court.”

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contend that this is justified because “additional facts have

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surfaced” indicating a “broader pattern of misconduct” by Lennon,

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Hoyal, and others, but provide no specific evidence to support

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this allegation.

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failure to oppose the motion for summary judgment.

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excuse Plaintiffs’ failure to conduct any discovery in this case

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to develop their claims.

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Northern District of California

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in arguing that Defendants’ motion is based on a single factual

Id.

Id.

Plaintiffs

This does not excuse Plaintiffs’ complete
Nor does it

In any event, Plaintiffs are mistaken

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premise.

As explained below, Defendants have shown an absence of

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evidence to support Plaintiffs’ case on each and every claim,

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shifting the burden to Plaintiffs to produce “specific evidence,

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through affidavits or admissible discovery material, to show that

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the dispute exists.”

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have not done so,4 summary judgment is warranted on all claims.

Bhan, 929 F.2d at 1409.

Because Plaintiffs

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A.

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Plaintiffs’ first cause of action contains two allegations

Fraud

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of fraud: (1) the balance sheet misrepresented Novato

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Development’s assets and liabilities and (2) Lennon conspired

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with others to create a “sham sale” of seventeen lots owned by

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Novato Development to a third party, Rudnick Estates Realty

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Plaintiffs claim that they could not adequately respond to
the motion for summary judgment because they did not know whether
the Court would consider their motion to dismiss and thus their
time to respond was “shortened.” This does not provide an excuse
for not responding to a pending summary judgment motion, which is
required to be filed within fourteen days of filing the motion by
Civil Local Rule 7-3, unless otherwise ordered by the Court. If
Plaintiffs felt they needed more time to respond, they could have
sought an extension of time pursuant to Civil Local Rule 6-1. In
any event, Plaintiffs inexplicably filed their opposition twelve
days late, undermining their argument that they did not have time
to form an adequate response.
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Group, Inc. (Rudnick).
The Purchase Agreement provides that the “Agreement shall be
construed in accordance with, and shall be governed by, the laws

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of the State of Oregon.”

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Oregon law, the elements of fraud are: “(1) a representation; (2)

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its falsity; (3) its materiality; (4) the speaker’s knowledge of

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its falsity or ignorance of its truth; (5) his intent that it

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should be acted on by the person and in the manner reasonably

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Northern District of California

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contemplated; (6) the hearer's ignorance of its falsity; (7) his

Purchase Agreement at 4, 10.d.

Under

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reliance on its truth; (8) his right to rely thereon; (9) and his

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consequent and proximate injury.”

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Dairy Prod. Co., 190 Or. 332, 350 (1950).

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a fraud claim by “clear and convincing” evidence, which is a

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higher standard than a mere preponderance of the evidence.

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Hill Gen. Contractor, Inc. v. Tandy Corp., 303 Or. 390, 402

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(1987).

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Conzelmann v. Nw. Poultry &
A plaintiff must prove

Riley

Defendants point out that Plaintiffs have not adequately

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alleged that Defendants made any misrepresentation.

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to the first allegation of fraud, it was Plaintiffs, not

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Defendants, who made representations about the assets and

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liabilities of Novato Development.

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With respect

Section 5 states:

5. Seller hereby represents and warrants to Buyer, and
covenants to Buyer, as follows . . .
i. The Balance Sheet annexed hereto as Exhibit “D”
materially represents the current assets and
liabilities of the company as of the Effective Date.
Thus, Plaintiffs cannot show that this was a misrepresentation
made by Defendants.
Regarding the second allegation of fraud, Plaintiffs have

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not identified a representation.

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Development and Rudnick is not, in and of itself, a

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representation.

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burden of showing a disputed issue of fact with respect to their

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fraud claim.

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B.

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Northern District of California

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A transaction between Novato

Accordingly, Plaintiffs have not met their

Legal malpractice, dual representation of adverse
interests, and breach of fiduciary duty

Plaintiffs’ second, third, and fourth causes of action all
rely on their allegation that Lennon represented Plaintiffs as an
attorney in connection with the sale of Novato Development.

See

Complaint ¶ 33 (alleging reasonable reliance given “their
attorney-client relationship); ¶¶ 39, 41 (alleging Lennon “was
representing plaintiffs in the aforementioned matter” and “failed
to disclose the areas of potential conflict” between Mirsyl and
Plaintiffs); ¶ 45 (alleging breach of fiduciary duty based on an
“attorney-client relationship that existed between defendant
Lennon and plaintiffs”).

Because Plaintiffs have already

conceded that Lennon did not represent Plaintiffs in connection
with the sale of Novato Development, these claims must fail.

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C.

Derivative action

Plaintiffs’ fifth cause of action is a member derivative
action that alleges that Novato Development’s assets were
undervalued.

Defendants contend that Plaintiffs failed to make

the requisite demand and that they lack standing to bring this
claim.

Defendants are correct that Plaintiffs have not alleged

that they made a demand on Mirsyl, the only member of Novato
Development, or Lennon, the manager.

While Plaintiffs alleged it

was futile to make a demand on Hoyal, Hoyal resigned as a manager

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almost a year prior to this suit, on November 5, 2015.

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Decl., Ex. L.

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standing to bring a derivative action because they sold their

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ownership interest in Novato Development as a result of the

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Purchase Agreement.

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(9th Cir. 2010) (the “continuous ownership requirement” provides

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that “[i]f a shareholder is divested of his or her shares during

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the pendency of litigation, that shareholder loses standing”).

United States District Court
Northern District of California

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D.

Lennon

In addition, Plaintiffs cannot show that they have

Quinn v. Anvil Corp., 620 F.3d 1005, 1012

Restitution/constructive trust/equitable lien

Plaintiffs’ sixth cause of action for

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restitution/constructive trust/equitable lien alleges that

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Defendants wrongfully acquired Novato Development, requiring

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imposition of a constructive trust in favor of Plaintiffs in

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order to prevent unjust enrichment of Defendants.

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¶¶ 56-58.

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right.

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This claim does not stand on its own but, rather, depends on the

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other causes of action.

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too, must fail.

Complaint

This is an equitable remedy rather than a substantive

Barnes v. E. & W. Lumber Co., 205 Or. 553, 596–97 (1955).

Because those claims fail, this claim,

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E.

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Defendants conterclaimed for attorneys’ fees pursuant to a

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clause in the Pledge Agreement stating that a party is entitled

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to attorneys’ fees necessary to enforce the Agreement.

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Plaintiffs oppose Defendants’ request for attorneys’ fees,

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contesting that this action falls within the purview of the

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Pledge Agreement’s attorneys’ fees clause.

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brief, they represent that they will make a separate motion for

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fees after the Court rules on the present motions, pursuant to

Attorneys’ fees

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In Defendants’ reply

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Federal Rule of Civil Procedure 54.

At the hearing, Defendants

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agreed to dismiss their counterclaim without prejudice so that

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the Court could enter judgment.

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bring a motion for attorneys’ fees pursuant to Federal Rule of

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Civil Procedure 54.

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dismissed without prejudice.

Defendants reserve the right to

Accordingly, Defendants’ counterclaim is

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CONCLUSION
The Court DENIES Plaintiffs’ motion to dismiss without

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United States District Court
Northern District of California

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prejudice (Docket No. 43) and GRANTS Defendants’ motion for

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summary judgment (Docket No. 45) as to all Plaintiffs’ claims.

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Defendants’ counterclaim is dismissed without prejudice.

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Clerk of the Court shall enter judgment in favor of Defendants,

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who shall recover their costs from Plaintiffs.

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The

IT IS SO ORDERED.

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Dated: March 29, 2018
CLAUDIA WILKEN
United States District Judge

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