SVGRP LLC et al v. Sowell Financial Services, LLC et al

Filing 18

ORDER by Magistrate Judge Howard R. Lloyd granting #8 defendants' Motion to Dismiss the complaint with leave to amend. Amended pleading due within 15 days from the date of this order. (hrllc2, COURT STAFF) (Filed on 4/18/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

United States District Court
Northern District of California

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SVGRP LLC, et al.,

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Case No.5:16-cv-07302-HRL

Plaintiffs,

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v.

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SOWELL FINANCIAL SERVICES, LLC,
et al.,

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ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS THE
COMPLAINT WITH LEAVE TO
AMEND
Re: Dkt. No. 8

Defendants.

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In this diversity action, plaintiffs SVGRP, LLC (SVGRP) and Concert Wealth

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Management, Inc. (Concert) sue for alleged breach of contract, fraud, libel/slander, and unfair

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business practices. Pursuant to Fed. R Civ. P. 12(b)(6), defendants Sowell Financial Services,

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LLC (Sowell Financial) and William C. Sowell move to dismiss the complaint for failure to state a

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claim for relief. Upon consideration of the moving and responding papers, as well as the oral

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arguments presented, the court grants the motion with leave to amend.1
BACKGROUND

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Plaintiffs’ complaint alleges the following:

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On or about September 26, 2016, SVGRP and Sowell Financial entered into a Master

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All parties have expressly consented that all proceedings in this matter may be heard and finally
adjudicated by the undersigned. 28 U.S.C. § 636(c); Fed. R. Civ. P. 73.

Service Agreement (Agreement). According to the Agreement’s recitals, Sowell Financial is a

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Registered Investment Advisor with the Securities Exchange Commission that provides various

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regulatory and technical support services to independent Investment Advisor Representatives

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(IARs). (Dkt. 1-1, Complaint, Ex. A, Agreement at ECF p. 1). The recitals go on to state that

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Sowell Financial has agreements with IARs to provide them with “back office and technical

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support services,” in addition to its regulatory services. And, SVGRP is said to be “in the business

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of providing back office and technical support services to both” Registered Investment Advisors

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and IARs. (Id.). So, according to the recitals, Sowell Financial and SVGRP entered into the

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Agreement “to allow [Sowell Financial] to retain [SVGRP] to perform back office and technical

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services on its behalf for IARs formerly registered with [Concert], with whom [Sowell Financial]

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United States District Court
Northern District of California

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has contracted, in accordance with the terms and conditions of this Agreement and Statements of

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Work (as defined below).” (Id.). Relevant to the discussion here, the Agreement says that “[i]n

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exchange for the Services provided hereunder, [Sowell Financial] shall pay to [SVGRP] a

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percentage of fees, commissions, or payments that it receives from IARs pursuant to the [Sowell

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Financial]/IAR agreements entered into the [sic] IAR’s formerly registered with [Concert] as set

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forth in each Statement of Work attached hereto as Exhibit A.” (Dkt. 1-1, Agreement at ECF p.

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2).

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Plaintiffs allege that, in reliance on the Agreement, Concert facilitated the transfer of

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financial advisors to Sowell Financial, including the transfer of the advisors’ client portfolios.

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Shortly after that transfer was complete, Sowell Financial allegedly “began verbally and in writing

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falsely advising financial advisors that [SVGRP] and Concert had breached the Master Services

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Agreement and were not acting in good faith.” (Dkt. 1, Complaint at ¶ 9). Then, say plaintiffs,

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Sowell Financial wrongfully purported to cancel the Agreement and refuses to pay the

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compensation required by the contract. They then filed this lawsuit, asserting four claims for

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relief: (1) breach of contract, (2) fraud, (3) slander and libel; and (4) unfair business practices

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(Cal. Bus. & Prof. Code § 17200).

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Defendants move to dismiss each claim on the ground that the complaint fails to allege
sufficient facts establishing a claim for relief. Fed. R. Civ. P. 12(b)(6). For the reasons discussed
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below, the court grants the motion with leave to amend.
LEGAL STANDARD

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A motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) tests
the legal sufficiency of the claims in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir.

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2001). Dismissal is appropriate where there is no cognizable legal theory or an absence of

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sufficient facts alleged to support a cognizable legal theory. Id. (citing Balistreri v. Pacifica Police

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Dep’t, 901 F.2d 696, 699 (9th Cir. 1990)). In such a motion, all material allegations in the

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complaint must be taken as true and construed in the light most favorable to the claimant. Id.

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However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory

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statements, do not suffice.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). Moreover, “the court

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United States District Court
Northern District of California

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is not required to accept legal conclusions cast in the form of factual allegations if those

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conclusions cannot reasonably be drawn from the facts alleged.” Clegg v. Cult Awareness

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Network, 18 F.3d 752, 754-55 (9th Cir. 1994).

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Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the

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claim showing that the pleader is entitled to relief.” This means that the “[f]actual allegations

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must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v.

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Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citations omitted)

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However, only plausible claims for relief will survive a motion to dismiss. Iqbal, 129 S.Ct. at

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1950. A claim is plausible if its factual content permits the court to draw a reasonable inference

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that the defendant is liable for the alleged misconduct. Id. A plaintiff does not have to provide

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detailed facts, but the pleading must include “more than an unadorned, the-defendant-unlawfully-

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harmed-me accusation.” Id. at 1949.

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Documents appended to the complaint or which properly are the subject of judicial notice

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may be considered along with the complaint when deciding a Fed. R. Civ. P. 12(b)(6) motion. See

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Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990);

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MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986).

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While leave to amend generally is granted liberally, the court has discretion to dismiss a
claim without leave to amend if amendment would be futile. Rivera v. BAC Home Loans
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Servicing, L.P., 756 F. Supp.2d 1193, 1997 (N.D. Cal. 2010) (citing Dumas v. Kipp, 90 F.3d 386,

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393 (9th Cir. 1996)).
DISCUSSION

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A.

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This claim is asserted by plaintiff SVGRP as to defendant Sowell Financial. Defendants

Breach of Contract

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argue that Agreement is incomplete and indefinite with respect to a material term: the

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compensation to be paid to plaintiffs. As discussed, the Agreement provides that Sowell Financial

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was to pay SVGRP “a percentage of fees, commissions, or payments that it receives from IARs . .

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. as set forth in each Statement of Work attached hereto as Exhibit A.” (Dkt. 1-1, Agreement at
ECF p. 2). Defendants contend that the Agreement is incomplete because the referenced

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United States District Court
Northern District of California

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Statements of Work are missing from the contract. Thus, defendants argue, there were no

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mutually agreed terms of consideration, and the Agreement’s terms are not sufficiently definite to

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give rise to a contractual obligation with respect to SVGRP’s compensation.

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“To be enforceable, a promise must be definite enough that a court can determine the scope

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of the duty and the limits of performance must be sufficiently defined to provide a rational basis

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for the assessment of damages.” Ladas v. California State Auto. Ass’n, 23 Cal. Rptr.2d 810, 814

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(Cal. Ct. App. 1993). Thus, “‘[u]nder California law, a contract will be enforced if it is

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sufficiently definite . . . for the court to ascertain the parties’ obligations and to determine whether

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those obligations have been performed or breached.’” Rockridge Trust v. Wells Fargo, N.A., 985

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F. Supp.2d 1110, 1142 (N.D. Cal. 2013) (quoting Ersa Grae Corp. v. Fluor Corp., 1 Cal. App.4th

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613, 623, 2 Cal.Rptr.2d 288 (1991)). “Conversely, a contract is void and unenforceable where a

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contract is so uncertain and indefinite that the intention of the parties on material questions cannot

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be ascertained.” Id. (citing Ladas, 23 Cal.Rptr.2d at 814)). “Whether a contract term is

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sufficiently definite to be enforceable is a question of law for the court.” Ladas, 23 Cal. Rptr. at

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814 n.2.

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Here, SVGRP points out that “[a] written instrument is presumptive evidence of a

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consideration,” Cal. Civ. Code § 1614, and that even “[w]hen a contract does not determine the

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amount of consideration nor the method by which it is to be ascertained . . . the consideration must
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be so much money as the object of the contract is reasonably worth,” Cal. Civ. Code § 1611.

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Citing Sabatini v. Hensley, 326 P.2d 622 (Cal. S. Ct. 1958), SVGRP argues that the Agreement

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need not specify how compensation was to be ascertained. Sabatini is inapposite. That case

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concerned an offer of employment for a specified salary and an indefinite bonus. (Recognizing

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that the offered salary was low, the defendant-employer offered to make up for it later in bonuses.)

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Id. at 623. There being evidence that the promised bonuses induced the plaintiff-employee to

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continue his employment with the defendant, the court found that it did not matter that no formula

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for determining bonuses was ever specified. Instead, it concluded that the bonuses could be

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calculated as the reasonable value of the plaintiff’s services over and above his agreed salary. Id.

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Here, by contrast, the Agreement indicates that SVGRP and Sowell Financial

United States District Court
Northern District of California

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contemplated that the “percentage of fees, commissions, or payments” to be paid to SVGRP was

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to be ascertained pursuant to matters set out in the referenced Statements of Work. What those

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matters might be, however, is anyone’s guess. Nor is it clear from the complaint’s allegations

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what might have happened to the Statements of Work that apparently were to be appended to the

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Agreement. Plaintiffs simply say that they should be given leave to amend to allege their

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understanding as to what the would-be Statements of Work meant. But where, as here, the

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“parties have agreed that a written instrument is the exclusive and final embodiment of their

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contract, then the written contract is integrated, and parol evidence is inadmissible to alter or

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enlarge its terms.” Brawthen v. H&R Block, Inc., 104 Cal. Rptr. 486, 490 (Cal. Ct. App. 1972).

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Accordingly, defendants’ motion to dismiss the contract claim is granted. While the court

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harbors some doubt whether plaintiffs properly may amend their complaint to fix the identified

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deficiency, they are given leave to amend if they believe that they can, in compliance with Fed. R.

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Civ. P. 11, allege sufficient facts establishing a plausible claim for relief.

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B.

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The complaint alleges that defendants engaged in promissory fraud by “enter[ing] into the

Fraud

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[Agreement] with [SVGRP] without any intention to perform.” (Complaint ¶ 13). This claim is

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asserted by plaintiffs as to all defendants. Defendants contend that the complaint does not allege

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sufficiently specific facts to establish a claim for fraud. Additionally, they argue that there is no
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basis to assert this claim against defendant Sowell, who is not himself a party to the Agreement.

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The court agrees.

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To state a claim for fraud under California law, a plaintiff must allege: (1) a

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misrepresentation (false representation, concealment, or non-disclosure); (2) knowledge of falsity

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(or scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5)

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resulting damage. Lazar v. Super. Ct., 909 P.2d 981, 984 (Cal. 1996). “Promissory fraud is a

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subspecies of fraud. A plaintiff asserting a promissory fraud claim must plead and prove that the

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defendant made a promise to him that it had no intention of performing.” UMG Recordings, Inc.

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v. Global Eagle Entertainment, Inc., 117 F. Supp.2d 1092, 1109 (C.D. Cal. 2015); see also Hsu v.
OZ Optics Ltd., 211 F.R.D. 615, 620 (N.D. Cal. 2002) (stating that promissory fraud “is

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Northern District of California

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cognizable when a party enters into an agreement without intending to be bound by its terms.”).

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“However, promissory fraud is not exempted from the strictures of [Fed. R. Civ. P.] Rule

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9(b), and a plaintiff is required to plead facts from which the Court can infer that the allegedly

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fraudulent statements were actually false when made.” Hsu, 211 F.R.D. at 620 (citation omitted).

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This means that allegations of fraud must be stated with “specificity including an account of the

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‘time, place, and specific content of the false representations as well as the identities of the parties

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to the misrepresentations.’” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (quoting

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Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004)). To survive a motion to

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dismiss, “‘allegations of fraud must be specific enough to give defendants notice of the particular

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misconduct which is alleged to constitute the fraud charged so that they can defend against the

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charge and not just deny that they have done anything wrong.’” Id. (quoting Bly-Magee v.

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California, 236 F.3d 1014, 1019 (9th Cir. 2001)).

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Here, the complaint, which impermissibly lumps all defendants together, is devoid of any

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facts supporting any false representation, when any such representation was made, and by whom.

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Nor do plaintiffs plead any facts specifying the time, place, and specific content of any alleged

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false representations. The complaint simply says that defendants had no intent to perform under

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the Agreement. However, “nonperformance alone will not support a finding of promissory fraud.”

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UMG Recordings, Inc., 117 F. Supp.3d at 1110. “Although intent can be averred generally under
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Rule 9(b), a plaintiff must point to facts which show that defendant harbored an intention not to be

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bound by terms of the contract at formation.” Id. at 1109-10 (emphasis added); see also Hsu, 211

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F.R.D. at 620 (same). No such facts are alleged here.

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To support their contention that individual defendant Sowell may be held liable for fraud,

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plaintiffs point out that he signed the Agreement. They cite Oncology Therapeutics Network

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Connection v. Virginia Hematology Oncology PLLC for the general proposition that “[i]f an

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entity’s representative committed a tort, such as fraud, in connection with the contract, plaintiff

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could sue the signatory as an individual for his tort.” No. C05-3033 WDB, 2006 WL 334532 at

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*10 (N.D. Cal., Feb. 10, 2006). That case is inapposite. There, the court concluded, on summary
judgment, that the parties’ credit agreement did not personally bind the defendant’s signatory to

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United States District Court
Northern District of California

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the debt. In any event, plaintiffs have failed to allege any facts establishing a claim for fraud in

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connection with the Agreement, much less any facts demonstrating that Sowell justifiably could

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be held liable for fraud. This claim is dismissed with leave to amend.

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C.

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The elements of a claim for defamation, which may be brought as a claim for slander or

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libel are “1) a publication, 2) that is false, 3) defamatory, and 4) unprivileged, and 5) that has a

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natural tendency to injure or that causes special damage.” Wilson v. Florida Dep’t of Revenue,

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No. 14-cv-04726-JCS, 2015 WL 136557 at *12 (N.D. Cal., Jan. 8, 2015) (citing Taus v. Loftus, 40

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Cal.4th 683, 720, 54 Cal.Rptr.3d 775, 151 P.3d 1185 (2007)). “While the exact words or

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circumstances of the defamation need not be alleged, the substance of the defamatory statement

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must be alleged to state a claim.” Id. (citing Silicon Knights, Inc. v. Crystal Dynamics, Inc., 983

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F. Supp. 1303, 1314 (N.D. Cal. 1997)).

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Slander and Libel

Defendants argue that the complaint fails to allege a defamatory statement. With respect to

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Sowell Financial, the complaint alleges that defendant “began verbally and in writing falsely

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advising financial advisors that [SVGRP] and Concert had breached the Master Services

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Agreement and were not acting in good faith.” (Complaint ¶ 9). The complaint goes on to allege

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that defendant Sowell sent a letter to Concert’s financial advisors “falsely telling advisors that

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Concert, Felipe Luna and Elizabeth Luna [Concert’s principals] were interfering in the
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management and claiming Fidelity might remove financial advisors from Fidelity platform.” (Id.

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¶ 20). As currently drafted, the complaint does not allege sufficient facts providing context or

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meaning, such that these alleged statements could reasonably be interpreted as defamatory. This

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claim is dismissed with leave to amend.

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D.

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Although “[v]iolation of almost any federal, state, or local law may serve as the basis for a

Unfair Business Practices, Cal. Bus. & Prof. Code § 17200

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UCL claim,” Plascencia v. Lending 1st Mortgage, 259 F.R.D. 437, 448 (N.D. Cal. 2009),

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plaintiffs’ § 17200 claim necessarily rises or falls with their other claims for relief. Because

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defendants’ motion to dismiss is granted with leave to amend as to all underlying claims for relief,

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plaintiffs’ § 17200 claim is also dismissed with leave to amend.
ORDER

United States District Court
Northern District of California

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Based on the foregoing, defendants’ motion to dismiss is granted with leave to amend.

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Plaintiff’s amended pleading must be filed within 15 days from the date of this order. Leave to

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amend is limited to those claims pled in the complaint and consistent with the rulings above. To

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the extent plaintiffs intend to assert new or different claims for relief or add new parties, they must

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make an appropriate motion pursuant to Fed. R. Civ. P. 15.

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SO ORDERED.

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Dated: April 18, 2017

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HOWARD R. LLOYD
United States Magistrate Judge

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5:16-cv-07302-HRL Notice has been electronically mailed to:

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David Irwin Kornbluh

[e-mail], [e-mail]

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Frank Joseph Perretta

[e-mail], [e-mail]

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Janelle Dease

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Thomas John Borchard

[e-mail]
[e-mail]

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United States District Court
Northern District of California

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