Stromberg v. Harder et al
Filing
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Order on 9 Defendants' Motion to Dismiss by Magistrate Judge Howard R. Lloyd. (hrllc1, COURT STAFF) (Filed on 10/20/2015)
E-Filed 10/20/15
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA
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LOUIS STROMBERG,
Case No. 15-cv-02765-HRL
Plaintiff,
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v.
ORDER ON DEFENDANTS’ MOTION
TO DISMISS
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MATTHEW HARDER, et al.,
Re: Dkt. No. 9
Defendants.
United States District Court
Northern District of California
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Louis Stromberg (“Stromberg”) allegedly invested about $3,000,000 in seven investment
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deals offered to him by Matthew Harder (“Harder”). Stromberg alleges that: (1) Harder agreed to
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secure most of these investments with notes and first trust deeds recorded against titles to
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underlying real property; (2) Harder, instead of properly securing the investments, provided
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several Addendums to Ownership of Note Purchase; (3) Harder told Stromberg those documents
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were as good as if notes and first deeds of trust had been duly assigned to Stromberg; (4) those
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documents did not properly secure most of Stromberg’s investments; and (5) the full balances on
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most of the notes are due back to Stromberg but have not been paid, except that one of the
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investment notes provides for payments to begin in June 2016.
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Stromberg argues that Harder, Harder’s associates, and the limited liability companies of
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Harder and his associates defrauded Stromberg by making misrepresentations to Stromberg and
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then failing to properly invest, secure, and repay Stromberg’s funds.
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corporate veil should not protect the natural-person defendants because the LLCs are just alter
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egos of the natural-person defendants. Stromberg brings 11 claims in total, including common-
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law fraud, violations of securities laws, breaches of contract, breaches of fiduciary duty, an action
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for judicial foreclosure of property in San Diego, and an action for an accounting of money given
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by Stromberg to several of the defendants. Harder’s codefendants include Christine Martinez
Stromberg argues the
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(“Martinez”); Southwest Financial Solutions, LLC (“Southwest”); Gary L. Gloer; Florida Keys
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Acquisitions, LLC; Jodie Ann Jones; and Bay Area Housing, LLC.
Harder, Martinez, and Southwest (“Defendants”) move under Federal Rules of Civil
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Procedure (“FRCP”) 9(b) and 12(b)(6) to dismiss several claims. Defendants argue claims one,
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two, and four should be dismissed because Stromberg does not allege securities fraud with the
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level of detail required by FRCP 9(b) and the Private Securities Litigation Reform Act
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(“PSLRA”). Defendants also argue that claims seven and eight do not clearly or plausibly allege
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the violation of any particular law. Defendants lastly argue that claim eight, the sale of securities
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without a required permit, does not state a cognizable legal theory because the “real property
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investments” in this case “do not count as securities requiring a permit” under the law cited by
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United States District Court
Northern District of California
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Stromberg.
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The parties who have appeared—Stromberg, Harder, Martinez, and Southwest—have
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expressly consented to magistrate jurisdiction. The court read the parties’ briefs and considered
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the governing law. Claims one, two, four, and seven are dismissed with leave to amend. Claim
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eight is not dismissed.
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Discussion
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A motion to dismiss under FRCP 12(b)(6) tests the legal sufficiency of the claims in the
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complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is appropriate where
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there is no cognizable legal theory or there are insufficient facts alleged to support a cognizable
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legal theory. Id. (citing Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990)).
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The court assumes the truth of factual allegations and construes them in the light most favorable to
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the claimant. Id. But the court may disregard conclusions not supported by underlying factual
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allegations. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). The court then draws upon its
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“experience and common sense” to answer a “context-specific” question: do the alleged facts
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support a plausible claim on which relief might be granted? Id. at 679.
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The alleged facts must provide the opposing party fair notice and an opportunity to defend
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itself effectively, and those facts must suggest it would be fair to subject the opposing party to the
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expense of defending against the claim. Eclectic Properties East, LLC v. Marcus & Millichap
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Co., 751 F.3d 990, 996 (9th Cir. 2014) (collecting cases and discussing pleading standards).
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A fraud claim has five elements under California law: (1) misrepresentation, whether by
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false representation, concealment, or nondisclosure; (2) knowledge of falsity; (3) intent to induce
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reliance; (4) justifiable reliance; and (5) resulting damage. Lazar v. Superior Court, 12 Cal. 4th
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631, 638 (1996). A fraud claim has not been pled with the particularity required by FRCP 9(b) if
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the complaint does not allege the time, place, and content of the fraudulent representation.
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Shroyer v. New Cingular Wireless Services, Inc., 622 F.3d 1035, 1042 (9th Cir. 2010). Fraud
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allegations should describe the “who, what, when, where, and how” of the alleged misconduct.
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Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003).
United States District Court
Northern District of California
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Stromberg provides details about the timing of different investments, Dkt. No. 1 at 5-8, but
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does not provide specific details about where, when, or how Harder made any particular
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misrepresentation that induced any particular investment. Stromberg alleges Harder began to offer
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these investments “on or about July 20, 2013” and that each investment was induced by a
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misrepresentation that Stromberg’s funds “would only be invested in notes secured by deeds of
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trust or mortgages in first position against title to the property serving as security.” Dkt. No. 1 at
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5. Stromberg has adequately described the content of a misrepresentation that was allegedly
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repeated as part of each offer—Stromberg’s funds would be secured by deeds of trust or
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mortgages in first position against title to specified real property—but Stromberg has not
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adequately described the time or place of any particular misrepresentation.
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Likewise, the complaint describes who invested what, but does not allege when, where, or how
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any given fraudulent misrepresentation occurred. Vess, supra. Claims one, two, and four are
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therefore dismissed for lack of the detailed factual allegations required by FRCP 9(b).
Shroyer, supra.
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The seventh claim—“Material Misrepresentations in Securities Transactions” in violation
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of “Federal and California Corporate Securities Law”—states that Stromberg is entitled to
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“damages as a result of Defendants’ disposition of the consideration Plaintiff paid them[.]” Dkt.
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No. 1 at 21. As discussed, Stromberg has not clearly and particularly explained where, when, and
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how any particular misrepresentation was made.
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As well, Stromberg’s bare claim that the
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misrepresentations violated “Federal and California Corporate Securities Law” does not provide
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clear notice to Defendants of what conduct may have violated which laws. Stromberg has not
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supported the seventh claim with factual allegations that plausibly show relief might be granted.
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Iqbal, 556 U.S. at 679. The alleged facts do not provide Defendants with fair notice and the
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opportunity to defend themselves effectively against the seventh claim, and the alleged facts do
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not suggest it would be fair to subject Defendants to the expense of defending against the seventh
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claim. Eclectic, 751 F.3d at 996. The seventh claim is dismissed with leave to amend.
The eighth claim, however, plausibly states a claim upon which relief might be granted.
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Stromberg alleges Harder and Southwest violated California Corporations Code § 25503 by
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issuing promissory notes without a permit for each of the seven investments. Defendants argue
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United States District Court
Northern District of California
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claim eight is too vague, like claim seven, but the court disagrees. Stromberg pleads the substance
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of each investment and the substance of each related promissory note with particularity, Dkt. No. 1
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at 5-8, and the alleged issuance of those notes without a permit plausibly shows Stromberg is
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entitled to relief under § 25503. The alleged facts provide Defendants with fair notice and the
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opportunity to defend themselves effectively against the eighth claim, and the alleged facts suggest
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it would be fair to subject Defendants to the expense of defending against the eighth claim.
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Eclectic, 751 F.3d at 996.
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Defendants’ alternative argument—that § 25100 of California Corporations Code exempts
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“real property investments” from classification as “securities” that require a permit—misreads
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California law. A note is not exempt simply because the money raised was spent on real property.
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Rather, that exemption may apply to a note only if that note is secured by real property. People v.
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Schock, 152 Cal. App. 3d 379, 390 (1984). Stromberg alleges Harder and Southwest failed to
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secure the majority of the issued notes with real property, Dkt. No. 1 at 5-9, so the alleged facts
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plausibly show the exemption raised by Defendants does not apply in this case.
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Conclusion
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Claims one, two, and four are dismissed for lack of the detailed allegations required by
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FRCP 9(b). Claim seven is dismissed under FRCP 12(b)(6) for failure to state a plausible claim
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upon which relief might be granted. Claim eight is not dismissed because Stromberg’s allegations
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plausibly show he is entitled to relief under that claim. Stromberg may file a First Amended
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Complaint amending the dismissed claims within the next 20 days. He may not add new claims
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without first obtaining leave of court.
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IT IS SO ORDERED.
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Dated: 10/20/15
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________________________
HOWARD R. LLOYD
United States Magistrate Judge
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United States District Court
Northern District of California
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