Monterey Bay Military Housing, LLC et al v. Ambac Assurance Corporation et al

Filing 266

ORDER DENYING 223 DEFENDANTS' MOTION TO DISMISS SECOND AMENDED COMPLAINT; SUA SPONTE RECONSIDERING PRIOR ORDER DENYING MOTION TO TRANSFER ACTION TO SOUTHERN DISTRICT OF NEW YORK; AND GRANTING MOTION TO TRANSFER. Signed by Judge Beth Labson Freeman on 9/26/2019. (This is the unredacted version of the sealed document filed on 9/26/2019 at 261 ). (blflc1S, COURT STAFF) (Filed on 10/3/2019)

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1 2 3 4 5 UNITED STATES DISTRICT COURT 6 NORTHERN DISTRICT OF CALIFORNIA 7 SAN JOSE DIVISION 8 9 MONTEREY BAY MILITARY HOUSING, LLC, et al., 10 Plaintiffs, 11 United States District Court Northern District of California v. 12 AMBAC ASSURANCE CORPORATION, et al., 13 Defendants. 14 Case No. 17-cv-04992-BLF ORDER DENYING DEFENDANTS’ MOTION TO DISMISS SECOND AMENDED COMPLAINT; SUA SPONTE RECONSIDERING PRIOR ORDER DENYING MOTION TO TRANSFER ACTION TO SOUTHERN DISTRICT OF NEW YORK; AND GRANTING MOTION TO TRANSFER [Re: ECF 223] 15 16 17 This action arises from alleged wide-scale fraud in the financing of military housing 18 19 projects. Plaintiffs are eighteen “project entities” that were authorized to construct housing on 20 military bases in fifteen states.1 Plaintiffs claim that they were defrauded by the lenders financing 21 the construction, the company insuring the loans, and others, in violation of RICO2 and state 22 common laws. 23 24 25 26 27 28 1 Plaintiffs are: Monterey Bay Military Housing, LLC; Monterey Bay Land, LLC; Fort Bliss/White Sands Missile Range Housing LP; Carlisle/Picatinny Family Housing LP; Stewart Hunter Housing LLC; Fort Leavenworth Frontier Heritage Communities, I, LLC; Fort Leavenworth Frontier Heritage Communities, II, LLC; Meade Communities LLC; Riley Communities LLC; Bragg Communities LLC; Fort Detrick/Walter Reed Army Medical Center LLC; Picerne Fort Polk Funding LLC; Rucker Communities LLC; Sill Housing, LLC; AETC Housing LP; AMC West Housing LP; Lackland Family Housing, LLC; and Vandenberg Housing LP. 2 Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. 1 Defendants are New York based companies and their employees: Ambac Assurance 2 Corporation (“Ambac”), the New York based company that insured the construction loans; Chetan 3 Marfatia (“Marfatia”), a New York resident who served as Ambac’s Managing Director; Jefferies 4 Mortgage Finance, Inc., Jefferies & Company, Inc., Jefferies LLC, and Jefferies Group LLC 5 (collectively, “Jefferies”),3 New York based companies that provided Project financing; and 6 Danny Ray (“Ray”), a former Managing Director of Jefferies and of its predecessor, GMAC 7 Commercial Mortgage Corporation (“GMAC”). Shortly after this lawsuit was filed, Defendants Ambac, Marfatia, and Jefferies moved for 8 9 transfer to the United States District Court for the Southern District of New York (“SDNY Court”) pursuant to 28 U.S.C. § 1404(a). The moving parties argued that Plaintiffs had alleged a civil 11 United States District Court Northern District of California 10 RICO conspiracy operated out of New York, by Defendants residing and/or working in New 12 York, who negotiated the allegedly fraudulent agreements in New York. The Court denied the 13 § 1404(a) motion based largely on the significant weight it accorded Plaintiffs’ choice of forum. 14 The parties thereafter engaged in substantial motion practice, culminating in Defendants’ 15 current motion to dismiss the operative second amended complaint (“SAC”), in which they argue 16 first that the SAC fails to state a claim under Federal Rule of Civil Procedure 12(b)(6), and next 17 that Plaintiffs cannot establish personal jurisdiction over most Defendants under Federal Rule of 18 Civil Procedure 12(b)(2). Taking those arguments in the order presented by the parties, the Rule 19 12(b)(6) motion is DENIED, as the claims are adequately pled. The Rule 12(b)(2) motion is well- 20 taken in part, as the Court has determined that it lacks personal jurisdiction over all Defendants 21 except Ambac. However, in light of the latter determination, the Court finds it appropriate to sua 22 sponte reconsider its denial of Defendants’ prior motions to transfer. The Court concludes that the 23 balance of the § 1404(a) factors has changed and the interests of justice now dictate transfer to the 24 SDNY where most, if not all, Defendants are subject to personal jurisdiction. The Rule 12(b)(2) 25 motion therefore is DENIED and the action is TRANSFERRED to the SDNY Court. 26 27 28 3 The Court treats the four Jefferies entities as a single defendant for ease of discussion. 2 I. 1 BACKGROUND4 In 1996, Congress enacted the Military Housing Privatization Initiative (“MHPI”), 2 3 authorizing the Department of Defense to enter agreements with private sector developers to 4 improve housing for military families. SAC ¶ 1, ECF 210-3. The resulting MHPI “project 5 entities,” also referred to in the SAC as “Projects,” collectively needed billions of dollars of long- 6 term financing for the housing construction. SAC ¶ 4. Plaintiffs allege that GMAC and Ambac, 7 through their respective managing directors Ray and Marfatia, formed a RICO enterprise (later 8 joined by Jefferies) to illegally profit from that financing. SAC ¶¶ 4, 7. GMAC/Ray and Ambac/Marfatia began working with the Projects in 2002. SAC ¶¶ 5-6. 9 Ray successfully pitched GMAC as a financial advisor to many of the Projects and he played a 11 United States District Court Northern District of California 10 key role in structuring the construction financing, which ultimately ended up with GMAC acting 12 not only as a financial advisor but also as the lender. SAC ¶ 5. Ray recommended that Ambac be 13 selected to insure or “credit enhance” each loan, which allowed GMAC to syndicate the loan by 14 selling bonds as AAA-rated. SAC ¶ 6. Although Ray told the Projects that GMAC and Ambac 15 were acting at arms-length, in reality Ray and Marfatia operated GMAC and Ambac as a joint 16 venture, pursuant to which GMAC gave Ambac the exclusive right to provide bond insurance. Id. 17 Ray and Marfatia used this undisclosed relationship to charge the Projects hundreds of millions of 18 dollars in inflated and undisclosed fees and profits. Id. GMAC was sold in a leveraged buyout in 2006 and it ultimately became Capmark. SAC ¶ 19 20 4 & n.1. In 2009, Capmark went into bankruptcy and its military housing servicing business was 21 sold to Jefferies Mortgage Finance, Inc. Id. Plaintiffs refer to GMAC and Capmark collectively 22 as “GMAC” in the SAC. Id. Ray moved to Jefferies with the housing servicing business. Id. 23 Inflated Interest Rates and Undisclosed Profits on Project Loans 24 Plaintiffs allege that Ray, as Managing Director of GMAC, represented to each of the 25 Projects that he and GMAC would serve as a “financial advisor” who would negotiate key 26 27 28 4 The background section is drawn from the allegations of the SAC, which are accepted as true for purposes of Defendants’ Rule 12(b)(6) motion. See Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). 3 1 documents, advise on optimal financial structure, and obtain the best market rates for the Projects. 2 SAC ¶ 9. Ray specifically stated that GMAC would act under his direction as a fiduciary and that 3 he would use his “best efforts” to negotiate the most competitive market rate and efficient 4 financial structure. Id. Starting in 2009, when Jefferies acquired the military housing servicing 5 business and hired Ray, Ray assured the Projects that his role as financial advisor would remain 6 the same. SAC ¶ 10. The Projects continued to view Ray and Jefferies as their trusted financial 7 advisor and agent through 2012. Id. Defendant Jefferies Mortgage Finance, Inc., which served as 8 a lender on the Sill and Bliss Projects, did disclaim a financial advisor or fiduciary relationship 9 role, but that disclaimer by its express terms related only Jefferies Mortgage Finance, Inc. in its role as lender and not to Ray, his team, or the other Jefferies entities that interacted with the 11 United States District Court Northern District of California 10 Projects and employed Ray. Id. 12 Beginning with the Meade Project that closed in 2002, and the Bragg Project that closed in 13 2003, Ray and GMAC began to use their position of trust and confidence to defraud, taking secret 14 profits. SAC ¶ 11. “The scheme was not fully formed, however, until late 2002/2003 in 15 connection with the Monterey Project, when Ray and GMAC first set the interest rate above 16 market to include undisclosed profits in the form of an inflated ‘credit spread’ (the difference 17 between a bond’s coupon rate or yield and an underlying benchmark rate).” Id. “Ray and 18 Marfatia continued this new element of the fraud, through a variety of changing artifices and 19 misrepresentations, at subsequent Plaintiff Projects.” Id. By making a minor and undetected 20 inflation in the interest rate above market, Ray and GMAC (and later Jefferies) were able to reap 21 substantial excess and immediate profits when they syndicated the loan by selling bonds. Id. This 22 practice was contrary to Ray’s representation that “that the credit spread was set based on the ‘risk 23 premium required by investors.’” SAC ¶ 12. Ray personally received approximately 40% of the 24 bond profits, which he never disclosed to the Projects. The bond purchasers were not harmed by 25 the scheme, as they received full and accurate disclosures. SAC ¶ 13. “The deception was only 26 directed at the Projects themselves, who were misled about when the bonds were sold (or 27 committed) and the supposed market basis that formed the credit spread.” Id. Ray and GMAC 28 concealed their fraud by assuring the Projects that they were not making a profit on the bond sales 4 1 to third-party investors. SAC ¶ 14. There was no available market data that would have allowed 2 the Projects to detect the inflated credit spread, which made the Projects dependent on Ray’s role 3 as their financial advisor. Id. 4 Ambac bought some of the bonds, directly or indirectly, at a premium to par. SAC ¶ 15. 5 Ambac did so at the Monterey Project and, in return, Ray and GMAC used Ambac almost 6 exclusively in subsequent Projects, allowing Ambac to avoid competition and charge inflated 7 credit enhancement fees. Id. 8 Manipulation of Shadow Ratings from S&P 9 Ray and Marfatia insisted on using “shadow” ratings, which are unofficial ratings given to a bond or an issuing party, rather than public ratings to determine the appropriate loan interest 11 United States District Court Northern District of California 10 rates and the necessary amount of loan insurance/credit enhancement for each transaction. SAC ¶ 12 16. Ray and Marfatia specifically represented that they would attempt to obtain the highest or 13 most favorable shadow rating. SAC ¶ 17. Ray and Marfatia “rigged the rating system” by 14 instructing Standard & Poor’s (“S&P”) that none of the projects involving Ambac credit 15 enhancement should receive a shadow rating higher than an “A.” SAC ¶ 17. Many Projects not 16 involving GMAC or Ambac received ratings above an “A” and therefore did not require credit 17 enhancement. Id. With respect to the Projects subject to the artificial rating cap of “A,” GMAC 18 and Ambac were able to charge excessive fees, rates, and other charges. Id. 19 Inflated and Unnecessary Credit Enhancement 20 Ray and Marfatia misrepresented to the Projects that the rating agencies required the 21 Projects not only to purchase bond insurance in the full amount of the loan, but also to purchase a 22 surety bond or cash fund a debt service reserve account in order to receive a AAA rating. SAC ¶ 23 18. “In truth, in or about 2002, at least S&P had made clear to Marfatia and Ray that it did not 24 require a surety or cash funding of the debt service reserve on a credit enhanced transaction in 25 order to rate the loan or bonds as AAA.” Id. Through their misrepresentations regarding the 26 rating agencies’ requirements, Ray and Marfatia were able convince the Projects to purchase 27 unnecessary sureties from Ambac at a hefty fee. FAC ¶ 19. 28 5 1 Inflated Deal Expenses 2 The Projects agreed to pay GMAC and Ambac actual deal expenses, sometimes subject to 3 a cap. SAC ¶ 20. GMAC and Ambac charged Plaintiffs inflated expenses that exceeded their 4 actual expenses, by as much as hundreds of thousands of dollars. Id. 5 Concealment of Exclusive Relationship and Fraud 6 Despite promising the Projects that he would use good faith and best efforts to negotiate 7 credit enhancement fees, Ray did not engage in any meaningful negotiations with Ambac but 8 returned to Ambac for credit enhancement over and over. SAC ¶ 22. In 2006, on the Riley 9 transaction, Ray emailed Marfatia that he was secretly giving Ambac an “extra 4.5 bps” on the 10 deal because it was “extra” and Ray did not want to give it back to the Project. SAC ¶ 21. United States District Court Northern District of California 11 In 2004, the Army’s consultant, Jones Lang LaSalle (“JLL”), suggested that GMAC 12 competitively bid out credit enhancement. SAC ¶ 23. In an email to his boss, Marfatia stated that 13 there could be “no worse news.” Id. Ray, Marfatia, and Ambac modified their scheme to 14 convince the Projects that credit enhancement would not be necessary for forthcoming deals, and 15 thus there was no need to open the bidding to Ambac’s competitors. Id. Defendants developed a 16 “stealth structure” to help conceal and maintain their fraud scheme. Id. First, Ray represented to 17 the Projects that GMAC would close the loan and then later attempt to syndicate the loan post- 18 closing, thereby taking market risk. SAC ¶ 24. Actually, Ray and GMAC set the Projects’ loan 19 interest rate above market and sold the bonds prior to close at premium to par, thus taking millions 20 of dollars in undisclosed profits. Id. Second, Ray, Marfatia, and Ambac secretly built into the 21 loan interest rate a monthly fee for Ambac credit enhancement, without disclosing the involvement 22 of Ambac. Id. Third, GMAC convinced the Projects to purchase liquidity facility from GMAC in 23 lieu of a surety bond, representing it was cheaper. However, GMAC immediately assigned the 24 liquidity facility to Ambac, which issued a surety bond in lieu of the liquidity facility at about half 25 the price of the liquidity facility. Id. Ray and Marfatia then agreed to split the liquidity facility 26 fee between GMAC and Ambac. Id. 27 Jefferies Entities 28 In 2009, Jefferies bought Ray’s MHPI business. SAC ¶ 25. In the due diligence, Ray 6 1 disclosed to Jefferies the fraudulent nature of the MHPI financings, including his role as a 2 financial advisor, the pre-sale of bonds and secret trading profits generated by those sales. Id. 3 Jefferies brought Ray and his team on board and embraced the bond-related scheme. Id. In 2010, 4 with respect to financing provided to the Fort Sill Project, Ray and Jefferies made more than $5 5 million in secret trade profits on the pre-sale of the underlying bonds, through the use of an 6 Original Issue Discount (“OID”) on the loan. Id. “[T]he OID allowed Ray to sell underlying 7 MHPI bonds at a discount to par, yet still reap millions in undisclosed profits and convince the 8 Project that Jefferies had sold the bonds after closing, thereby purportedly taking post-closing 9 market and interest rate risk.” SAC ¶ 26. The OID did not impact the price paid by investors who 10 United States District Court Northern District of California 11 purchased the bonds and did not harm those investors. Id. By 2012, the opportunities to profit on the Projects were diminishing, because most of the 12 housing had been privatized. SAC ¶ 28. In 2011 and 2012, when the Bliss Project needed an 13 additional $140 million in debt, Ray and Jefferies saw one last opportunity to make outsized secret 14 profits. Id. They told the Bliss Project that the 2012 loan from Jefferies Mortgage was at market 15 rate, when “[i]n truth, Ray and Jefferies had secret pre-commitments from investors to buy the 16 debt at 8% above par – reflecting a significantly inflated interest rate on the loan.” SAC ¶ 29. 17 Ambac’s consent was required on the transaction, because Ambac had been involved in the 18 original 2005 Bliss transaction and had approval rights over the issuance of additional debt. SAC 19 ¶ 30. Ambac consented to the transaction after Ray emailed to say he had pre-sold the bonds prior 20 to closing and needed prompt consent for the transaction. Id. 21 2016 Events 22 Plaintiffs assert that because Defendants went to extraordinary lengths to fraudulently 23 conceal their scheme, Plaintiffs did not realize at the time that anything was amiss. In 2010 and 24 2011, the Army’s consultant JLL and developers on the Projects questioned Ray and Marfatia 25 about the Projects’ financial structure, including the OID and whether GMAC and Jefferies were 26 making a profit on the bond sales. SAC ¶ 31. Ray and his team stated that they were not taking 27 undisclosed profits on the MHPI deals and concealed key facts regarding the scheme. Id. JLL and 28 the developers were satisfied with those assurances, “made by their trusted financial advisor and 7 1 2 agent in response to direct questioning.” Id. In 2015, Ambac sued several of the Projects. SAC ¶ 32 & n.2. During those lawsuits, it 3 came out that Ray and Jefferies misled a California state court about the existence of MHPI 4 transactional documents, and Ray tried to destroy more than 9,100 MHPI documents in the 5 custody of Jefferies. SAC ¶ 32. On April 8, 2016, Ray and Jefferies informed the Projects that 6 Ray had quit. Id. Plaintiffs claim that the facts unearthed in the state court litigation provided the 7 first notice to Plaintiffs of Defendants’ wrongdoing. SAC ¶¶ 32-33. The Present Lawsuit 9 Plaintiffs filed this action in August 2017, asserting claims under RICO and California 10 state law against Ambac, Marfatia, Jefferies, Ray, and two companies in which Ray allegedly 11 United States District Court Northern District of California 8 invested proceeds of the RICO scheme, Annandale Plantation, LLC (Colorado) and Annandale 12 Plantation, LLC (South Carolina). Compl., ECF 1. 13 Prior Transfer Motions under 28 U.S.C. § 1404(a) 14 Almost immediately, Ambac filed a motion to transfer the case to the SDNY Court under 15 28 U.S.C. § 1404(a), which was joined by Marfatia and Jefferies. See Ambac’s Motion to 16 Transfer, ECF 39; Marfatia’s Joinder, ECF 47; Jefferies’ Joinder, ECF 91. Jefferies also filed a 17 motion to dismiss or, in the alternative, to transfer under § 1404(a). See Jefferies’ Motion to 18 Dismiss or Transfer, ECF 63. Ambac, Marfatia, and Jefferies asserted that they would be subject 19 to general personal jurisdiction in New York, that the SDNY Court was a proper forum for the 20 action, and that the § 1404(a) factors favored transfer. See Ambac’s Motion to Transfer at 5, ECF 21 39; Jefferies’ Motion to Dismiss or Transfer at 22-23, ECF 63. Plaintiffs opposed transfer and 22 Ray did not take a position. See Pls.’ Opp. to Transfer, ECF 48. The Court concluded that the 23 moving parties had failed to satisfy their burden of demonstrating that balancing the factors 24 “clearly favors transfer” to the SDNY Court. Southern District. See Prior Order Denying 25 Transfer at 19, ECF 108. 26 Plaintiffs’ Claims 27 Plaintiffs filed a first amended complaint (“FAC”) in October 2017, which was the subject 28 of motions to dismiss brought by all Defendants. FAC, ECF 60; Prior Motions, ECF 62, 63, 64, 8 1 66, 71. The Court granted those motions with leave to amend. See Prior Dismissal Order, ECF 2 147. Among the issues addressed by the Court were the lack of allegations of wrongdoing by the 3 two Annandale Defendants, Plaintiffs’ failure to establish personal jurisdiction over Defendants, 4 and potential bars raised by applicable statutes of limitation and the Private Securities Litigation 5 Reform Act (“PSLRA”). Plaintiffs timely filed the operative SAC, dropping the Annandale Defendants and 6 addressing the other deficiencies noted in the Prior Dismissal Order. The SAC asserts seven 8 claims against the remaining Defendants, Ambac, Marfatia, Jefferies, and Ray: (1) Civil RICO in 9 violation of 18 U.S.C. § 1962(c); (2) conspiracy to commit Civil RICO in violation of 18 U.S.C. § 10 1962(d); (3) breach of fiduciary duty; (4) aiding and abetting breach of fiduciary duty; (5) fraud by 11 United States District Court Northern District of California 7 intentional misrepresentation; (6) fraud by fraudulent concealment; and (7) conspiracy to commit 12 fraud. 13 Pending Motions 14 All remaining Defendants have filed a joint motion to dismiss for failure to state a claim 15 and lack of personal jurisdiction. The Court addresses the issues in the order presented in the 16 briefing, first taking up the Rule 12(b)(6) arguments and then turning to the Rule 12(b)(2) 17 arguments. 18 II. RULE 12(b)(6) MOTION FOR FAILURE TO STATE A CLAIM 19 A. Legal Standard 20 “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a 21 claim upon which relief can be granted tests the legal sufficiency of a claim.” Conservation Force 22 v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (internal quotation marks and citation omitted). 23 While a complaint need not contain detailed factual allegations, it “must contain sufficient factual 24 matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 25 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A 26 claim is facially plausible when it “allows the court to draw the reasonable inference that the 27 defendant is liable for the misconduct alleged.” Id. 28 9 1 B. RICO Claims 2 Claim 1 asserts civil RICO in violation of 18 U.S.C. § 1962(c), while Claim 2 asserts 3 conspiracy to commit civil RICO in violation of 18 U.S.C. § 1962(d). Defendants move to 4 dismiss the RICO claims on the grounds that: they are time-barred, they are subject to the bar to 5 RICO claims effected by the Private Securities Litigation Reform Act (“PSLRA bar”), and they do 6 not allege facts sufficient to state a claim for relief. In opposition, Plaintiffs argue that their RICO 7 claims are not time-barred, they are not subject to the PSLRA bar, and they are adequately pled. 8 The Court addresses the asserted grounds for dismissal in turn. 9 10 1. Statute of Limitations Defendants assert that Plaintiffs’ RICO claims are barred by the applicable four-year United States District Court Northern District of California 11 statute of limitations. See Pincay v. Andrews, 238 F.3d 1106, 1108 (9th Cir. 2001) (“The statute 12 of limitations for civil RICO actions is four years.”). Plaintiffs’ claims are based on conduct 13 which began in 2002. See SAC ¶ 5. Most of the projects giving rise to this suit closed by 2008, 14 and the last project, Fort Sill, closed in 2010. SAC ¶¶ 97-150 (listing projects and closing dates). 15 Defendants Ray and Jefferies allegedly arranged additional financing for the Fort Bliss project in 16 2012. SAC ¶¶ 233-35. Plaintiffs did not file suit until August 2017, seven years after the last 17 project closed and more than four years after the last financing transaction was completed. See 18 Compl., ECF 1. However, Plaintiffs contend that their RICO claims are not time-barred because 19 Defendants fraudulently concealed material facts through 2016 such that Plaintiffs reasonably 20 believed they did not have a claim against Defendants. 21 Under the “injury discovery” rule followed in the Ninth Circuit, “the civil RICO 22 limitations period begins to run when a plaintiff knows or should know of the injury that underlies 23 his cause of action.” Pincay, 238 F.3d at 1109 (internal quotation marks and citation omitted). 24 “Thus, the ‘injury discovery’ rule creates a disjunctive two-prong test of actual or constructive 25 notice, under which the statute begins running under either prong.” Id. “The plaintiff is deemed 26 to have had constructive knowledge if it had enough information to warrant an investigation 27 which, if reasonably diligent, would have led to discovery of the fraud.” Id. at 1110 (internal 28 quotation marks and citation omitted). “[C]onstructive notice begins to run the statute of 10 1 limitations regardless of any fiduciary relationship between the injured and the injurer.” Id. at 2 1109. 3 “Equitable tolling doctrines, including fraudulent concealment, apply in civil RICO cases.” 4 Grimmett v. Brown, 75 F.3d 506, 514 (9th Cir. 1996). “The doctrine is properly invoked only if a 5 plaintiff establishes affirmative conduct upon the part of the defendant which would, under the 6 circumstances of the case, lead a reasonable person to believe that he did not have a claim for 7 relief.” Pincay, 238 F.3d at 1110 (internal quotation marks and citation omitted). 8 In its Prior Dismissal Order, the Court found that Plaintiffs had not alleged facts sufficient to show that they could not have discovered Defendants’ alleged fraud, and thus their alleged 10 injury, until 2016 as they claimed. See Prior Dismissal Order at 19-21, ECF 147. The Court 11 United States District Court Northern District of California 9 indicated that Plaintiffs had not explained why they could not have discovered that their loan 12 interest rates were set above market in connection with the “bond fraud,” since it was the Court’s 13 understanding that market rates are transparent. See id. The Court also observed that Plaintiffs’ 14 allegations that they had questioned Ray and Marfatia about transactional issues suggested that 15 Plaintiffs’ suspicions had been raised, but they did not allege that they undertook any 16 investigation. See id. The Court found the failure to investigate particularly troubling in light of 17 Plaintiffs’ allegations that in 2005 JLL noticed that GMAC was using Ambac for credit 18 enhancement on all the MHPI deals, and that the Fort Bliss Project had insisted that GMAC 19 competitively bid out credit enhancement. See id. Finally, with respect to Plaintiffs’ allegations 20 that they were entitled to rely in the representations of Ray, GMAC, and Jefferies as Plaintiffs’ 21 fiduciaries, the Court concluded that Plaintiffs had not alleged fiduciary status with sufficient 22 particularity. See id. 23 Defendants contend that Plaintiffs have not cured these defects. The Court disagrees. 24 Taking these defects in reverse order, Plaintiffs have added numerous facts in support of their 25 contention that Ray, GMAC, and later Jefferies, held themselves out, and acted, as Plaintiffs’ 26 “trusted financial advisor.” See, e.g., SAC ¶¶ 5, 9, 111, 116, 140, 149, 150, 178. Moreover, the 27 SAC includes a flow chart disseminated by Ray and GMAC that differentiates between their roles 28 and lenders and as financial advisors. See SAC ¶ 94. The SAC also describes specific oral 11 1 representations of fiduciary relationship that Ray and GMAC allegedly made, promising to act as 2 the Projects’ agents in negotiating surety bonds, coordinating with rating agencies, negotiating 3 term loans, and the like. See SAC ¶¶ 95-99, 102. In written correspondence with the Monterey 4 Project in 2002 and 2003, Ray represented that GMAC would act as a “Financial Advisor” to the 5 project and that GMAC would “use its best efforts to negotiate the most favorable rates.” SAC ¶¶ 6 107-08. Ray made similar written and oral representations to the Army’s consultant, JLL, prior to 7 the October 2003 close at the Monterey Project. SAC ¶ 109. These allegations, and others of a 8 similar nature, are sufficient to allege that Ray and GMAC acted not only as the Projects’ lenders, 9 but also as their trusted financial advisors. 10 Defendants contend that these allegations are insufficient, because “[u]nder California law, United States District Court Northern District of California 11 a lender does not owe a borrower or third party any duties beyond those expressed in the loan 12 agreement, except those imposed due to special circumstance.” Sipe v. Countrywide Bank, 690 F. 13 Supp. 2d 1141, 1153 (E.D. Cal. 2010). Defendants ignore Plaintiffs’ allegations of special 14 circumstances, namely, specific representations by Ray and GMAC that they would act not only 15 as Plaintiffs’ lender but as their financial advisers. Defendants argue that a “financial advisor” is 16 not synonymous with “fiduciary.” However, numerous cases recognize that “trusted financial 17 advisors” owe their clients fiduciary duties. See, e.g., Primiani v. Fed. Ins. Co., 203 F. App’x 902, 18 904 (9th Cir. 2006) (“Appellants – as trusted financial advisers of myCFO’s clients – owed a 19 fiduciary duty towards the clients.”); Johnson v. Fujitsu Tech. & Bus. of Am., Inc., 250 F. Supp. 3d 20 460, 466 (N.D. Cal. 2017) (recognizing that in the ERISA context, a “fiduciary” is “someone 21 acting in the capacity of manager, administrator, or financial adviser”); Goldman, Sachs & Co. v. 22 City of Reno, No. 3:12-cv-00327-RCJ-WGC, 2016 WL 320120, at *4 (D. Nev. Jan. 25, 2016) 23 (“The City has sufficiently alleged that GS acted as a financial advisor and breached its attendant 24 fiduciary duties by failing to disclose facts material to the way the auctions were conducted, i.e., 25 its supporting-bid practices.”); Freeney v. Bank of Am. Corp., No. CV 15-02376 MMM (PJWx), 26 2015 WL 12535021, at *35 (C.D. Cal. Nov. 19, 2015) (“[A] broker or financial advisor is in a 27 fiduciary relationship with his or her client.”). 28 Defendants point to loan agreements defining the scope of the parties’ “lending 12 1 relationship[s],” which do not establish any fiduciary duties. Plaintiffs’ theory, however, is that 2 Ray and GMAC were acting as their fiduciaries during the negotiation of those loan agreements, 3 and parallel to those agreements. Thus, the fact that the loan agreements themselves did not 4 impose fiduciary duties on Defendants is not dispositive. The Court concludes that Plaintiffs have 5 alleged enough facts to render the precise nature of the roles Ray and GMAC played (and later 6 Jefferies), and in particular whether they acted as Plaintiffs’ fiduciaries, a factual question not 7 appropriate for resolution at the motion to dismiss stage. See Fischer v. Ocwen Loan Servicing, 8 LLC, No. CV-14-94-BLG-SPW-CSO, 2014 WL 6685987, at *9 (D. Mont. Nov. 25, 2014), report 9 and recommendation adopted, No. CV 14-94-BLG-SPW-CSO, 2014 WL 11498231 (D. Mont. Dec. 11, 2014) (finding that whether a fiduciary relationship existed between a loan servicer and 11 United States District Court Northern District of California 10 mortgagee required a fact intensive inquiry which could not be resolved on a motion to dismiss); 12 Goodness Films, LLC v. TV One, LLC, No. CV 12-8688-GW(JEMX), 2013 WL 12145508, at *11 13 (C.D. Cal. Feb. 28, 2013) (“In light of these allegations and the requirement that they be construed 14 in the light most favorable to the plaintiff in deciding a motion to dismiss, the Court ‘cannot say 15 with certainty that plaintiffs can prove no set of facts entitling them to relief on a breach of 16 fiduciary or aiding and abetting breach of fiduciary theory.’”). 17 With respect to the Court’s concern in the Prior Dismissal Order that Plaintiffs appeared to 18 be on inquiry notice, Plaintiffs have omitted prior allegations that JLL observed GMAC’s 19 preference for using Ambac for credit enhancement in 2005. Defendants contend that Plaintiffs 20 may not simply eliminate factual allegations which give rise to a statute of limitations defense. 21 However, the law in the Ninth Circuit is clear that “there is nothing in the Federal Rules of Civil 22 Procedure to prevent a party from filing successive pleadings that make inconsistent or even 23 contradictory allegations.” PAE Gov’t Servs., Inc. v. MPRI, Inc., 514 F.3d 856, 860 (9th Cir. 24 2007). Moreover, the SAC alleges that when JLL requested that Project credit enhancement be 25 competitively bid starting in 2005, Defendants modified their scheme to convince the Projects that 26 credit enhancement would not be necessary for forthcoming deals, and thus there was no need to 27 open the bidding to Ambac’s competitors. SAC ¶ 23. Defendants developed a “stealth structure” 28 to help conceal and maintain their fraud scheme, under which a monthly fee for Ambac credit 13 1 enhancement was secretly built into the loan interest, without disclosure to Plaintiffs. SAC ¶ 24. 2 Accordingly, the Court concludes that Plaintiffs’ amendment to their allegations was permissible 3 and that in any event Plaintiffs adequately have explained that their failure to inquire further into 4 GMAC’s preference for using Ambac by alleging that Defendants modified their scheme to make 5 it appear unnecessary to obtain (and thus bid out) credit enhancement. 6 With respect to the Court’s question as to why Plaintiffs could not have discovered that their loan rates were set above market in connection with the bond fraud, Plaintiffs argue that the 8 Court’s prior ruling was based on a factual misunderstanding, and that unlike publicly reported 9 bond interest rates, the determination of market rate for the bonds at issue in this case was not 10 transparent. Plaintiffs allege facts showing that there was no “available market data that would 11 United States District Court Northern District of California 7 have allowed the Projects to detect the inflated credit spread.” SAC ¶ 14; see also SAC ¶¶ 178- 12 180. Plaintiffs also allege that they specifically relied on the representations of Ray as their 13 financial advisor. Id. Plaintiffs allege on that some occasions, the Army’s consultant JLL and 14 developers on the Projects questioned Ray and Marfatia about the Projects’ financial structure, and 15 specifically whether GMAC and Jefferies were making a profit on the bond sales. SAC ¶ 31. Ray 16 and his team stated affirmatively that they were not taking undisclosed profits on the MHPI deals 17 and concealed key facts regarding the scheme. Id. Plaintiffs allege that JLL and the developers 18 were satisfied with those assurances, “made by their trusted financial advisor and agent in 19 response to direct questioning.” Id. 20 While Defendants argue that Plaintiffs have not adequately explained their failure to do 21 more investigation, the Court is satisfied that Plaintiffs’ detailed allegations regarding Defendants’ 22 affirmative misrepresentations in the face of Plaintiffs’ queries regarding Defendants’ profits, the 23 existence of a fiduciary relationship, and the substantial steps Defendants undertook to conceal 24 their misconduct are sufficient to create a factual issue whether Plaintiffs are entitled to equitable 25 tolling of the statute of limitations. That factual issue is not appropriate for resolution at this stage 26 of the proceedings. See Starr Indem. & Liab. Co. v. JT2, Inc., No. 1:17-cv-00213-DAD-BAM, 27 2018 WL 1142207, at *4 (E.D. Cal. Mar. 2, 2018) (“Regardless of when the evidence to be 28 presented in this case may ultimately show that JT2 was on inquiry notice of the alleged 14 1 fraudulent concealment, the pleadings must be accepted as true and any dispute as to that factual 2 question can certainly not be resolved at this stage of the proceedings.”). 3 4 5 Accordingly, Defendants’ motion to dismiss the RICO claims as time-barred is DENIED. 2. PSLRA Bar Defendants assert that Plaintiffs’ RICO claims are subject to dismissal based on an amendment to the RICO statute effected by the PSLRA, providing that (with one exception not 7 relevant here) “‘no person may rely upon any conduct that would have been actionable as fraud in 8 the purchase or sale of securities to establish a violation of section 1962.’” Howard v. Am. Online 9 Inc., 208 F.3d 741, 749 (9th Cir. 2000) (quoting 18 U.S.C. § 1964(c)). The PSLRA bar applies 10 even where the RICO plaintiff himself could not bring a securities fraud claim, as long as such 11 United States District Court Northern District of California 6 claim could be brought by some plaintiff with proper standing. Id. (applying PSLRA bar where 12 “Plaintiffs do not dispute that their securities fraud claims could be brought by a plaintiff with 13 proper standing”). 14 In its Prior Dismissal Order, the Court addressed Defendants’ arguments that the RICO 15 claims were barred based on both the “bond fraud” and “GIC” aspects of the RICO scheme as 16 alleged in the FAC. See Prior Dismissal Order at 15-18, ECF 147. The Court held that the 17 PSLRA was not implicated by the bond fraud allegations. However, the Court determined that the 18 GIC allegations did give rise to the PSLRA bar, and it dismissed Plaintiffs’ RICO claims based on 19 that determination. The SAC realleges the bond fraud scheme but it omits the GIC aspect of the 20 scheme. Defendants once again seek dismissal of the RICO claims under the PSLRA bar based on 21 both the omitted GIC allegations and the bond fraud allegations. The Court addresses the omitted 22 GIC allegations and the current bond fraud allegations in turn. 23 a. GICs 24 As alleged in the FAC, a significant portion of the loan proceeds were not needed 25 immediately, and sometimes not until years after closing. See FAC ¶ 16. Ray recommended to 26 Plaintiffs that unused portions of the loans be invested in Guaranteed Investment Contracts 27 (“GICs”). See id. Based on the allegations of the FAC, the Court determined that the GICs were 28 securities, and that Plaintiffs appeared to be relying on allegations of fraud related to the GICs as 15 1 predicate acts under RICO. See Prior Dismissal Order at 16-18. The Court concluded that the 2 alleged GIC-related fraud brought Defendants’ conduct within the scope of § 10(b) of the 3 Securities Exchange Act of 1934 and Rule 10b-5, triggering the PSLRA bar. See id. The Court 4 dismissed Plaintiffs’ RICO claims as barred by the PSLRA based on authorities holding that 5 “where a plaintiff alleges a ‘single scheme’ and any predicate act is barred under the PSLRA, the 6 entire RICO claim is precluded.” Perkumpulan Inv’r Crisis Ctr. Dressel-WBG v. Wong, No. C09- 7 1786-JCC, 2014 WL 1047946, at *7 (W.D. Wash. Mar. 14, 2014). 8 9 The Court noted that Plaintiffs had requested leave to amend to either add facts showing that the GICs were not securities or omit the allegations regarding the GICs. See Prior Dismissal Order at 18. The Court indicated that the parties had not adequately briefed the question of 11 United States District Court Northern District of California 10 whether a party may avoid the PSLRA bar by omitting prior allegations giving rise to the bar, and 12 that Defendants could argue the point in the event Plaintiffs chose to omit the GICs from their 13 amended pleading. See id. Plaintiffs have omitted almost all references to the GICs from the SAC 14 and they no longer allege conduct related to the GICs as predicate acts under RICO. 15 Defendants contend that the law precludes Plaintiffs from sanitizing their RICO claims, 16 and that Plaintiffs’ prior allegations regarding the GICs gives rise to the PSLRA bar despite 17 Plaintiffs’ omission of GIC allegations from the SAC. Plaintiffs assert that the law does not 18 prevent them from omitting the GICs as predicate acts under RICO and that, once omitted, the 19 GICs cannot be considered a basis for the PSLRA bar. 20 Defendants have cited no controlling authority, and the Court has found none, precluding a 21 RICO plaintiff from amending the allegations of predicate acts to omit previously alleged conduct 22 that would give rise to the PSLRA bar. As discussed above in connection with Defendants’ statute 23 of limitations argument, “there is nothing in the Federal Rules of Civil Procedure to prevent a 24 party from filing successive pleadings that make inconsistent or even contradictory allegations.” 25 PAE Gov’t Servs., 514 F.3d at 860. Defendants cite Walsh v. AMD Sacramento, No. 2:13-CV- 26 2077 MCE KJN, 2014 WL 4472752 (E.D. Cal. Sept. 11, 2014), report and recommendation 27 adopted (Dec. 29, 2014), which did not involve RICO claims but rather a pro se suit brought by 28 husband and wife following the wife’s adverse reaction to medication. In the cited portion of the 16 1 decision, the court stated that it was “troubled by plaintiffs’ noticeable attempts in the second 2 amended complaint to omit, sanitize, or otherwise alter certain allegations that were made in 3 plaintiffs’ first amended complaint which appeared unfavorable to the viability of their alleged 4 claims.” Id. at *15. It is not clear from the decision that the court held that such amendment was 5 precluded under the Federal Rules of Civil Procedure, but to the extent the Walsh court intended 6 such a holding, it would be contrary to the Ninth Circuit’s holding in PAE Gov’t Servs. 7 Defendants also cite Swartz v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007), for the proposition that dismissal of a RICO claim without leave to amend is appropriate when “the 9 PSLRA bar would apply under any internally consistent set of facts.” Swartz did not address the 10 issue before this Court, whether a RICO plaintiff may omit from an amended pleading predicate 11 United States District Court Northern District of California 8 acts based on conduct that would trigger the PSLRA bar. The Court does not view the SAC, 12 which omits predicate acts based on the GICs and alleges predicate acts based solely on the bond 13 fraud and related misconduct, as “internally [in]consistent” with the FAC, simply because the GIC 14 allegations have been omitted. Defendants cite Perkumpulan, for the same language cited by the 15 Court in the Prior Dismissal Order, holding that “where a plaintiff alleges a ‘single scheme’ and 16 any predicate act is barred under the PSLRA, the entire RICO claim is precluded.” Perkumpulan, 17 2014 WL 1047946, at *7. Perkumpulan no longer applies, because none of the predicate acts 18 Plaintiffs have alleged in the SAC are barred under the PSLRA. Perkumpulan, like the other cases 19 relied on by Defendants, simply fails to address whether a plaintiff may amend a RICO claim to 20 allege only predicate acts which are not barred by the PSLRA. 21 Defendants argue that the GIC allegations are inextricably intertwined with RICO claims 22 because one of the twelve services that Ray and GMAC allegedly provided in their role as 23 financial advisor was to “Secure Guaranteed Investment Contract Bid.” SAC at p. 32 (flow chart). 24 The Court is not persuaded that a stray reference to the GICs triggers the PSLRA bar. Similar 25 circumstances were presented to the district court in Sussex Fin. Enterprises, Inc. v. Bayerische 26 Hypo-Und Vereinsbank AG, No. 08-4791 SC, 2009 WL 3061976, at *4 (N.D. Cal. Sept. 24, 27 2009), cited by Plaintiffs. In Sussex, the defendant argued that the PSLRA bar applied based on 28 the first amended complaint’s reference to a “BLIPS” program which the Ninth Circuit had held in 17 1 other contexts to be actionable as securities fraud. The district court determined that the RICO 2 claim appeared to be based solely on a “CARDS” program, which did not implicate the PSLRA. 3 The court was not persuaded that mere reference to the “BLIPS” program in the pleading 4 implicated the PSLRA bar, stating that “the Court does not read the FAC to include BLIPS as a 5 predicate act, and thus Sussex is not ‘relying’ on BLIPS to establish a violation of RICO.” Id. 6 Under the same reasoning, this Court is not persuaded that the single reference to the GICs in the 7 SAC implicates the PSLRA bar where no GIC-related conduct is alleged to be a predicate act 8 under RICO. Having considered the arguments and authorities presented by the parties, the Court 9 concludes that the PSLRA bar is not implicated by Plaintiffs’ references to the GICs in the prior 11 United States District Court Northern District of California 10 iteration of their pleading, or by the single reference to the GICs in the SAC, where the operative 12 SAC does not rely on the GICs as predicate acts under RICO. The motion to dismiss the RICO claims based on the PSLRA bar as related to the GICs is 13 14 DENIED. b. 15 Bond Fraud As alleged in the FAC, the bond fraud aspect of the alleged RICO scheme stemmed from 16 17 Defendants’ representations that the Project loan interest rates were set at market, and that 18 Defendants would syndicate the loans by selling bonds or certificates after the loans closed, 19 thereby taking any risks with respect to changes in the market. FAC ¶ 102. Plaintiffs alleged that 20 in reality, Ray and GMAC had pre-sold the bonds at a profit prior to close of the loans, necessarily 21 meaning that the loan interest rates were set above market, which allowed Defendants to reap 22 immediate and outsized profits when they securitized the loans. FAC ¶¶ 103. The Court 23 concluded that the PSLRA did not apply to the “bond fraud,” because the facts alleged did not 24 give rise to a securities fraud claim by any potential private plaintiff. See Prior Dismissal Order at 25 15-16. 26 In reaching that conclusion, the Court found that in order to trigger the PSLRA bar the 27 misrepresentations need not be regarding the value of the securities, and need not suggest that the 28 securities transaction itself was illegal. See Prior Dismissal Order at 16. The Court relied on SEC 18 1 v. Zandford, 535 U.S. 813, 820 (2002), holding that Securities and Exchange Commission 2 (“SEC”) had stated a § 10(b) claim where a broker sold his clients’ securities and misappropriated 3 the proceeds, and Swartz v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007), holding that the 4 PSLRA bar applied where the plaintiff’s otherwise lawful sale of Microsoft stock was the 5 “lynchpin” of defendants’ fraudulent tax shelter scheme. However, the Court concluded 6 Defendants’ alleged conduct would have to be actionable by some plaintiff as securities fraud. See 7 Prior Dismissal Order at 13, 15-16. The Court found that the bond fraud would not have been 8 actionable by Plaintiffs as securities fraud, as Plaintiffs did not buy, sell, or assert an ownership 9 interest in, the bonds. See Prior Dismissal Order at 16. The Court also concluded that the alleged conduct would not have been actionable by the bond holders, as the FAC did not allege any 11 United States District Court Northern District of California 10 misrepresentations or injuries to them. See id. 12 Plaintiffs’ bond fraud allegations have not changed materially from the FAC to the 13 operative SAC. Defendants nonetheless ask the Court to reconsider its prior ruling that the 14 PSLRA bar is not implicated by the bond fraud allegations, asserting that even if the bond fraud 15 would not have been actionable as securities fraud by a private party, it would have been 16 actionable as securities fraud by the SEC. Defendants correctly point out that the parties did not 17 address that issue in any depth in the briefing on the prior motions and therefore that the Court has 18 not yet had occasion to consider whether alleged conduct could be actionable by the SEC. The 19 Court did not address the possibility of suit by the SEC in its Prior Dismissal Order. See ECF 147. 20 Defendants have not cited, and the Court has not discovered, any Supreme Court or Ninth 21 Circuit cases holding that the PSLRA bar applies when the SEC – but not a private party – has 22 authority to bring a securities fraud suit. However, some courts in this district have found that the 23 bar does apply where the SEC could bring action. See, e.g., Perkumpulan, 2014 WL 1047946, at 24 *11-12 (holding that PSLRA bar applied because the plaintiff’s claims “would be ‘actionable’ as 25 fraud in the purchase or sale of securities by the S.E.C.,” and “whether the S.E.C. could prevail 26 [was] beside the point.”); Pritikin v. Comerica Bank, No. C 09-03303 JF (RS), 2009 WL 3857455, 27 at *3 (N.D. Cal. Nov. 17, 2009) (applying PSLRA bar where the defendant’s alleged aiding and 28 abetting securities violation did not give rise to private right of action). This Court therefore 19 1 assumes for purposes of discussion that Plaintiffs’ RICO claims would be barred if the SEC could 2 have brought a securities fraud suit based on the alleged predicate acts. 3 “Congress designated the SEC as the primary enforcement agency for the securities laws,” 4 and it authorized the SEC to bring suit in circumstances where no private right of action lies. SEC 5 v. Rana Research, Inc., 8 F.3d 1358, 1364 (9th Cir. 1993). For example, although “only an actual 6 purchaser or seller may maintain a private damage action under Rule 10b-5, the Supreme Court 7 took care to state that ‘the purchaser-seller rule imposes no limitation on the standing of the SEC 8 to bring actions for injunctive relief under § 10(b) and Rule 10b-5.’” Id. (quoting Blue Chip 9 Stamps v. Manor Drug Stores, 421 U.S. 723, 751 n.14 (1975)). Moreover, the SEC need not prove actual reliance on the alleged misrepresentations in any particular purchase or sale of 11 United States District Court Northern District of California 10 securities. See id. at 136-64. The SEC need show only that “the fraud alleged somehow touches 12 upon or has some nexus with any securities transaction.” Id. at 1362 (internal quotation marks and 13 citation omitted). This “broad and flexible” view of the requirements for an SEC action “is necessary to 14 15 accomplish the statute’s purpose of protecting investors.” Rana, 8 F.3d at 1362 (emphasis added). 16 Indeed, all of the cases cited by Defendants as examples of SEC-initiated suits were brought to 17 protect investors or the market. In Rana, the SEC brought an action for injunctive relief against a 18 financial consultant who had issued a press release containing materially false and misleading 19 statements. See Rana, 8 F.3d at 1360-61. The Ninth Circuit rejected the defendants’ argument 20 that the SEC could not establish a securities fraud violation absent proof of a purchase or sale of 21 securities in reliance on the statements in the press release. See id. at 1361. The Ninth Circuit 22 held that “[w]here the fraud alleged involves public dissemination in a document such as a press 23 release, annual report, investment prospectus or other such document on which an investor would 24 presumably rely, the ‘in connection with’ requirement is generally met by proof of the means of 25 dissemination and the materiality of the misrepresentation or omission.” Id. at 1362 (emphasis 26 added). 27 28 The present case does not involve dissemination of any misrepresentations to the public. Plaintiffs specifically allege that “the purchasers of the bonds (including Ambac) were not harmed 20 1 by the scheme in any way; they received full and accurate disclosures regarding the Projects and 2 the interest rate being charged to the Projects, and continue to receive the full benefit of their 3 bargain in the form of interest payments that are made by the Projects.” SAC ¶ 13. This case 4 therefore is distinguishable from Rana. Defendants argue that this case is similar to Zandford, in which the SEC sued a securities 5 6 broker who misappropriated proceeds from sales of securities in his customers’ investment 7 account. Zandford, 535 U.S. at 815. Defendants argue that “[h]ere, just as in Zandford, the core 8 allegation is that some or all Defendants exploited an alleged duty of trust by promising to sell 9 securities and pass along the benefits of these sales to Plaintiffs, while secretly retaining the proceeds for themselves.” Defs.’ Joint Motion at 12, ECF 223. However, in Zandford, the SEC 11 United States District Court Northern District of California 10 brought suit to vindicate the investors who were bilked by the broker’s misappropriation of profits 12 from sales of securities. In the present case, Plaintiffs did not buy or sell securities, and there is no 13 allegation that the bond sales were unlawful. 14 Plaintiffs’ allegations are factually distinguishable from all of the SEC cases cited by 15 Defendants, because all of those cases involved the SEC’s exercise of its broad authority to protect 16 securities investors or the securities market. See, e.g., SEC v. Zouvas, No. 3:16-cv-0998-CAB- 17 (DHB), 2016 WL 6834028, at *1 (S.D. Cal. Nov. 21, 2016) (action against defendants who 18 allegedly perpetrated a “pump-and-dump” scheme to manipulate the stock of a publicly traded 19 company); SEC. v. Cotton, No. SACV 06-0905 AG (ANx), 2006 WL 6382128, at *1 (C.D. Cal. 20 Dec. 21, 2006) (SEC alleged that chief financial officer and chief operating officer fraudulently 21 recognized and reported revenue in order to meet the expectations of Wall Street analysts); SEC v. 22 Santos, 355 F. Supp. 2d 917, 919 (N.D. Ill. 2003) (Chicago officials allegedly defrauded city and 23 public by demanding bribes in return for selecting certain broker-dealers to invest city funds). 24 Defendants have cited no case in which the SEC brought suit on facts similar to those alleged by 25 Plaintiffs, that is, misrepresentations in the context of setting contractual interest rates on private 26 loans. 27 28 Absent some authority for the proposition that the SEC could or would bring suit on facts such as those alleged here, the Court concludes that the PSLRA bar does not apply. The motion to 21 1 dismiss the RICO claims based on the PSLRA bar as related to the bond fraud is DENIED. 3. 2 Finally, Defendants argue that Plaintiffs have not adequately pled their RICO claims. 3 4 Failure to Allege Sufficient Facts Plaintiffs contend that their RICO claims are well-pled. The RICO statute sets out four elements for a primary violation: a defendant must 5 6 participate in (1) the conduct of (2) an enterprise that affects interstate commerce (3) through a 7 pattern (4) of racketeering activity or collection of unlawful debt.” Eclectic Properties E., LLC v. 8 Marcus & Millichap Co., 751 F.3d 990, 997 (9th Cir. 2014). “In addition, the conduct must be (5) 9 the proximate cause of harm to the victim.” Id. “To show the existence of an enterprise under the second element, plaintiffs must plead that the enterprise has (A) a common purpose, (B) a 11 United States District Court Northern District of California 10 structure or organization, and (C) longevity necessary to accomplish the purpose.” Id. 12 “Racketeering activity, the fourth element, requires predicate acts,” often – as here – mail and wire 13 fraud. Id. “The mail and wire fraud statutes are identical except for the particular method used to 14 disseminate the fraud, and contain three elements: (A) the formation of a scheme to defraud, (B) 15 the use of the mails or wires in furtherance of that scheme, and (C) the specific intent to defraud.” 16 Id. 17 The Court previously dismissed Plaintiffs’ RICO claims, noting that the predicate acts of 18 mail and wire fraud were alleged in only the most general of terms, with no specificity regarding 19 the identity of the parties who made the alleged misrepresentations using the mail or interstate 20 wires, the content of such misrepresentations, or the time and place of such misrepresentations. 21 See Prior Dismissal Order at 21, ECF 147. At the hearing on the prior motions to dismiss, 22 Plaintiffs’ counsel acknowledged the general nature of the predicate act allegations, explaining 23 that Plaintiffs could not provide the requisite specificity due to a protective order in another case. 24 Counsel indicated that they would resolve that issue, and that the amended pleading would provide 25 adequate details. The Court also requested that Plaintiffs separate their primary RICO claim from 26 their RICO conspiracy claim. See id. 27 Plaintiffs have cured these defects. Plaintiffs allege that through the conduct described 28 above, Ray, Marfatia, Ambac, and now-defunct GMAC associated together in an enterprise in 22 1 2002 for the purpose of defrauding Plaintiffs of money. See SAC ¶¶ 253-58, 265-66. Jefferies 2 allegedly joined the enterprise in 2009. See SAC ¶ 262. Plaintiffs allege that each Defendant 3 committed predicate acts of mail fraud and wire fraud and that the racketeering activity continued 4 at least through 2012. See SAC ¶¶ 259-65. Plaintiffs allege that Defendants conduct violated 18 5 U.S.C. § 1962(c), and in a separate claim they also assert that Defendants conspired and agreed to 6 the RICO violations in violation of 18 U.S.C. § 1962(d). SAC ¶¶ 251-73. Defendants contend that Plaintiffs have failed to allege that Ray and Marfatia did anything 7 8 outside the scope of their employment, and therefore have failed to allege that Ray and Marfatia 9 separately joined the RICO enterprise. However, the Supreme Court has held that a corporate employee may be deemed a separate entity for purposes of RICO, because “[t]he corporate 11 United States District Court Northern District of California 10 owner/employee, a natural person, is distinct from the corporation itself, a legally different entity 12 with different rights and responsibilities due to its different legal status.” Cedric Kushner 13 Promotions, Ltd. v. King, 533 U.S. 158, 163 (2001). Defendants argue that Jefferies is not alleged 14 to have done enough to join the enterprise. However, Plaintiffs specifically allege that the 15 Jefferies Defendants learned of the scheme during their 2009 due diligence, and took affirmative 16 steps to conceal the ongoing fraud. See SAC ¶¶ 157-62. Plaintiffs also allege that the Jefferies 17 Defendants took affirmative acts to wring the last available profits out of the scheme when the 18 Bliss Project needed additional financing in 2011-2012. See SAC 28. Plaintiffs allege that Ray 19 and the Jefferies Defendants told the Bliss Project that the 2012 loan from Jefferies Mortgage was 20 at market rate, when “[i]n truth, Ray and Jefferies had secret pre-commitments from investors to 21 buy the debt at 8% above par – reflecting a significantly inflated interest rate on the loan.” SAC ¶ 22 29. 23 Defendants argue that Plaintiffs describe only ordinary business activities on the part of 24 Defendants. That argument simply ignores all of Plaintiffs’ allegations that Defendants defrauded 25 Plaintiffs through inflated loan rates, unnecessary credit enhancement, and hidden fees. 26 Defendants’ related argument that Plaintiffs have failed to allege an organization decision-making 27 structure likewise ignores Plaintiffs’ allegations that Defendants acted in concert, playing out the 28 same fraud on each of the successive projects starting in 2002-2003. 23 Defendants contend that Plaintiffs’ allegations of predicate acts are insufficient, arguing 1 that they are not all alleged to be fraudulent. However, “any mailing that is incident to an essential 3 part of the scheme satisfies the mailing element, even if the mailing itself contains no false 4 information.” In re Chrysler-Dodge-Jeep Ecodiesel Mktg., Sales Practices, & Prod. Liab. Litig., 5 295 F. Supp. 3d 927, 978 (N.D. Cal. 2018). The overall fraudulent nature of the scheme is 6 alleged, and Plaintiffs have identified specific wires and mailings by each Defendant and to each 7 Plaintiff in furtherance of the scheme. Defendants argue that Plaintiffs impermissibly “re-use” the 8 same wirings for multiple Defendants, for example, for Marfatia and Ambac. However, 9 Defendants fail to cite any authority for the proposition that where the predicate acts are alleged to 10 be done on behalf of both an individual corporate officer and the corporation, the predicate act can 11 United States District Court Northern District of California 2 be “counted” only once. Defendants similarly contend that a single mailing cannot constitute a 12 predicate act against more than one Plaintiff. However, the Court sees no difficulty with the 13 notion that a single email may constitute a predicate act with respect to multiple Plaintiffs when it 14 was sent to a developer who worked on several Projects. Defendants have not cited, and the Court 15 has not discovered, any authority to the contrary. With respect to Defendants’ arguments that Plaintiffs have not alleged separate acts with 16 17 respect to each of the Jefferies entities, Plaintiffs have alleged that the Jefferies entities in essence 18 have operated as one entity. While Defendants may be able to disprove that in an appropriate 19 motion or at trial, for pleading purposes Plaintiffs’ allegations are sufficient. See In re Chrysler- 20 Dodge-Jeep Ecodiesel Mktg., Sales Practices, & Prod. Liab. Litig., 295 F. Supp. 3d 927, 990 21 (N.D. Cal. 2018) (“[A]t this early stage in the proceedings, Plaintiffs have essentially been forced 22 to lump the Bosch companies because the Bosch Defendants have chosen to operate a specific 23 way.”). 24 The Court concludes that Plaintiffs’ complaint adequately alleges the elements of both the 25 primary RICO violation and RICO conspiracy against each Defendant. Accordingly, the motion 26 to dismiss the RICO claims is DENIED. 27 C. State Law Claims 28 Defendants assert that, absent a viable federal claim under RICO, the Court should decline 24 1 to exercise supplemental jurisdiction over Plaintiffs’ state law claims. As discussed above, the 2 Court finds that Plaintiffs have alleged viable RICO claims. Defendants contend that Plaintiffs’ state law claims should be dismissed as time-barred. 3 4 Those arguments fail for the same reasons discussed above with respect to the RICO claims. Marfatia contends that he cannot be liable for aiding and abetting breach of fiduciary duty 5 6 (Claim 4), because no fiduciary duty existed. As discussed above, the Court finds that Plaintiffs 7 have alleged that Ray and GMAC were Plaintiffs’ fiduciaries. Ambac contends that Plaintiffs’ allegations that it acted as a fiduciary are insufficient. See 8 9 SAC ¶¶ 166-72. For the reasons discussed above with respect to Ray, the Court concludes that Plaintiffs have alleged a fiduciary relationship. This ruling is without prejudice to a challenge to 11 United States District Court Northern District of California 10 the fiduciary relationship claims by appropriate future motion for summary judgment or at trial. 12 The motion to dismiss the state law claims is DENIED. 13 Having addressed Defendants’ first set of arguments, asserted under Rule 12(b)(6), the 14 15 Court next turns to Defendants’ second set of arguments, asserted under Rule 12(b)(2). III. RULE 12(b)(2) MOTION FOR LACK OF PERSONAL JURISDICTION 16 A. Legal Standard 17 A party may challenge the Court’s personal jurisdiction over it by bringing a motion to 18 dismiss under Federal Rule of Civil Procedure 12(b)(2). When a defendant raises a challenge to 19 personal jurisdiction, the plaintiff bears the burden of establishing that jurisdiction is proper. 20 Ranza v. Nike, Inc., 793 F.3d 1059, 1068 (9th Cir. 2015). The plaintiff may meet that burden by 21 submitting affidavits and discovery materials. Id. “Where, as here, the defendant’s motion is 22 based on written materials rather than an evidentiary hearing, the plaintiff need only make a prima 23 facie showing of jurisdictional facts to withstand the motion to dismiss.” Id. (internal quotation 24 marks and citation omitted). “[T]he plaintiff cannot simply rest on the bare allegations of its 25 complaint,” but when evaluating the plaintiff’s showing, the court must accept uncontroverted 26 allegations in the complaint as true and resolve factual disputes created by conflicting affidavits in 27 the plaintiff’s favor. Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 800 (9th Cir. 28 2004) (internal quotation marks and citation omitted). 25 1 B. Discussion 2 In the SAC, Plaintiffs allege that Defendants are subject to personal jurisdiction under 18 3 U.S.C. § 1965(a) and California’s long-arm statute. See SAC ¶¶ 64-68, 73-79. Plaintiffs also 4 allege that Defendants are subject to personal jurisdiction under the “ends of justice” provision of 5 the RICO statute, 18 U.S.C. § 1965(b). See SAC ¶¶ 62-63. 6 Defendants Marfatia, Jefferies, and Ray seek dismissal for lack of personal jurisdiction. 7 Ambac concedes personal jurisdiction with respect to the claims brought by the two Monterey 8 Plaintiffs. Defendants contend that: § 1965(a) is a venue statute that cannot give rise to personal 9 jurisdiction; Plaintiffs have not established sufficient minimum contacts to give rise to personal jurisdiction under California’s long-arm statute, excluding Ambac’s limited concession; and 11 United States District Court Northern District of California 10 personal jurisdiction does not lie under § 1965(b). Finally, Defendants argue that even if personal 12 jurisdiction could be established with respect to some claims, the majority of Plaintiffs’ claims are 13 foreclosed by Bristol-Myers Squibb Co. v. Superior Court, 137 S. Ct. 1773 (2017). The Court 14 addresses Defendants’ arguments in turn. 15 16 1. 18 U.S.C. § 1965(a) and California’s Long-Arm Statute Plaintiffs allege that personal jurisdiction lies “under § 1965(a) and the California long- 17 arm statute.” SAC ¶¶ 64, 66, 67, 68. Section 1965(a) provides that “[a]ny civil action or 18 proceeding under this chapter against any person may be instituted in the district court of the 19 United States for any district in which such person resides, is found, has an agent, or transacts his 20 affairs.” In its Prior Dismissal Order, the Court indicated that it is inclined to construe § 1965(a) 21 as a venue provision rather than as an independent basis for asserting personal jurisdiction. See 22 Prior Dismissal Order at 7 n.6, ECF 147. Plaintiffs do not argue to the contrary and, in fact, they 23 do not even mention § 1965(a) in their briefing on the present motion. Instead, Plaintiffs argue 24 that each Defendant has sufficient minimum contacts with California to confer personal 25 jurisdiction under the state’s long-arm statute. 26 Where no applicable federal statute governs personal jurisdiction, “the law of the state in 27 which the district court sits applies.” Harris Rutsky & Co. Ins. Servs., Inc. v. Bell & Clements 28 Ltd., 328 F.3d 1122, 1129 (9th Cir. 2003). “California’s long-arm statute allows courts to exercise 26 1 personal jurisdiction over defendants to the extent permitted by the Due Process Clause of the 2 United States Constitution.” Id. “[D]ue process requires that the defendant ‘have certain 3 minimum contacts’ with the forum state ‘such that the maintenance of the suit does not offend 4 traditional notions of fair play and substantial justice.’” Ranza, 793 F.3d at 1068 (quoting Int’l 5 Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (internal quotation marks and citation 6 omitted)). 7 A federal district court may exercise either general or specific personal jurisdiction over a 8 nonresident defendant. Daimler AG v. Bauman, 571 U.S. 117, 127-28 (2014). General 9 jurisdiction exists when the defendant’s contacts “are so continuous and systematic as to render [it] essentially at home in the forum State.” Id. at 139 (internal quotation marks and citation 11 United States District Court Northern District of California 10 omitted). In contrast, specific jurisdiction exists when the defendant’s contacts with the forum 12 state are more limited, but the plaintiff’s claims arise out of or relate to those contacts. Id. at 128. 13 Plaintiffs do not assert that general personal jurisdiction lies as to any of the Defendants; they 14 assert only the existence of specific personal jurisdiction. 15 The Ninth Circuit has established a three-prong test for whether a court can exercise 16 specific personal jurisdiction: (1) the defendant must have “either purposefully availed itself of 17 the privilege of conducting activities in California, or purposefully directed its activities toward 18 California,” thereby “invoking the benefits and protections of its laws”; (2) the claim must arise 19 out of or relate to the defendant’s forum-related activities; and (3) the exercise of jurisdiction must 20 be reasonable, i.e. it must comport with fair play and substantial justice. Schwarzenegger, 374 21 F.3d at 802. The plaintiff bears the burden on the first two prongs. Id. “If the plaintiff fails to 22 satisfy either of these prongs, personal jurisdiction is not established in the forum state.” Id. “If 23 the plaintiff succeeds in satisfying both of the first two prongs, the burden then shifts to the 24 defendant to present a compelling case that the exercise of jurisdiction would not be reasonable.” 25 Id. (internal quotation marks and citation omitted). 26 “[E]ach party’s contacts with the forum state must be assessed individually.” In re Boon 27 Glob. Ltd., 923 F.3d 643, 651 (9th Cir. 2019) (internal quotation marks, citation, and alteration 28 omitted). As noted above, Ambac concedes personal jurisdiction with respect to the Monterey 27 1 Plaintiffs’ claims. The Court therefore limits its discussion regarding the state’s long-arm statute 2 to Marfatia, Jefferies, and Ray. 3 Plaintiffs do not submit any affidavits or other evidence, relying exclusively on the 4 allegations of the SAC to satisfy their burden on the first two prongs. Even accepting Plaintiffs’ 5 uncontroverted allegations as true, see Schwarzenegger, 374 F.3d at 800, the Court finds that the 6 allegations identified by Plaintiffs are insufficient to make a prima facie showing of personal 7 jurisdiction as to Defendants Marfatia, Jefferies, or Ray. 8 9 a. Purposeful Availment / Purposeful Direction Purposeful availment and purposeful direction are two distinct concepts. Schwarzenegger, 374 F.3d at 802. A purposeful availment analysis generally is used in suits sounding in contract, 11 United States District Court Northern District of California 10 while a purposeful direction analysis generally is used in suits sounding in tort. Id. Plaintiffs 12 assert two RICO claims and five state law tort claims. Plaintiffs do not assert any contract claims. 13 Accordingly, the Court finds a purposeful direction analysis to be most appropriate. 14 In the Ninth Circuit, purposeful direction analysis is governed by the three-part “effects” 15 test derived from Calder v. Jones, 465 U.S. 783 (1984). Picot v. Weston, 780 F.3d 1206, 1213-14 16 (9th Cir. 2015). “Under this test, a defendant purposefully directed his activities at the forum if 17 he: (1) committed an intentional act, (2) expressly aimed at the forum state, (3) causing harm that 18 the defendant knows is likely to be suffered in the forum state.” Id. (internal quotation marks and 19 citation omitted). In applying this test, the court “must ‘look[ ] to the defendant’s contacts with 20 the forum State itself, not the defendant’s contacts with persons who reside there.” Id. (quoting 21 Walden v. Fiore, 571 U.S. 277, 284 (2014)). “[A]n injury is jurisdictionally relevant only insofar 22 as it shows that the defendant has formed a contact with the forum State.” Id. “The proper 23 question is not where the plaintiff experienced a particular injury or effect but whether the 24 defendant’s conduct connects him to the forum in a meaningful way.” Id. 25 26 i. Intentional Act The meaning of the term “intentional act” is essentially the same as in the context of 27 intentional torts, meaning that “the defendant must act with the intent to perform an actual, 28 physical act in the real world.” Picot, 780 F.3d at 1214. Plaintiffs allege that each Defendant 28 1 intentionally misrepresented material facts regarding rating agencies’ requirements for loan 2 sureties, the existence and amounts of fees, and the interest rates charged on the Project loans. See 3 SAC ¶¶ 288-292. Accordingly, this requirement is satisfied. ii. 4 Expressly Aimed 5 “The second prong of our test, express aiming, asks whether the defendant’s allegedly 6 tortious action was expressly aimed at the forum.” Picot, 780 F.3d at 1214 (internal quotation 7 marks and citation omitted). Plaintiffs allege that “Ray committed intentional torts, including 8 numerous instances of breach of fiduciary duty, fraud and violations of RICO, purposefully 9 directed at and causing harm to the Monterey, Vandenberg, and AMC West Project (which includes Travis Air Force Base) in California.” SAC ¶ 67. Plaintiffs make a nearly identical 11 United States District Court Northern District of California 10 allegation regarding Marfatia, stating that “Marfatia committed intentional torts, including 12 numerous instances of breach of fiduciary duty, fraud and violations of RICO, purposefully 13 directed at and causing harm to the Monterey, Vandenberg, and AMC West (which includes 14 Travis Air Force Base) Projects in California.” SAC ¶ 68. Plaintiffs allege that Jefferies 15 “continued the same pattern of racketeering activity” when it acquired the MHPI loan servicing 16 business in 2009. SAC ¶ 66. 17 Those conclusory allegations do not explain how Defendants’ torts were aimed “at” 18 California. While Plaintiffs claim that Defendants aimed tortious conduct at the four Plaintiffs 19 with projects in California – Monterey Bay Military Housing, LLC, Monterey Bay Land, LLC, 20 AMC West Housing LP, and Vandenberg Housing LP – the SAC does not allege any harm to the 21 physical housing developments in California. The SAC asserts business torts affecting the balance 22 sheets of Plaintiffs, none of which appear to be California citizens. See SAC ¶¶ 37, 38, 52, 54. 23 All four of the above Plaintiffs are alleged to be Delaware limited liability companies. See id. 24 Plaintiff Monterey Bay Military Housing, LLC is alleged to have its principal place of business in 25 Seaside, California. See SAC ¶ 37. However, unlike a corporation which takes its citizenship 26 from the state of incorporation and the state where it maintains its principal place of business, “an 27 LLC is a citizen of every state of which its owners/members are citizens.” Johnson v. Columbia 28 Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). The SAC does not allege that any 29 1 owner/member of Monterey Bay Military Housing, LLC, Monterey Bay Land, LLC, AMC West 2 Housing LP, or Vandenberg Housing LP is a citizen of California. Plaintiffs have not cited, and 3 the Court has not discovered, any case suggesting that loan transactions between non-citizens 4 create the requisite connection to California if the loan proceeds were used to fund construction in 5 California. 6 The Court has reviewed the portions of the SAC cited by Plaintiffs in their briefing to 7 determine whether the SAC alleges facts connecting Ray, Marfatia, or Jefferies to California in a 8 meaningful way. See Walden, 571 U.S. at 284 (holding that the key inquiry with respect to 9 personal jurisdiction is “whether the defendant’s conduct connects him to the forum in a 10 United States District Court Northern District of California 11 meaningful way”). The Court concludes it does not. With respect to Ray, Plaintiffs direct the Court’s attention to paragraph 107 of the SAC in 12 support of their assertion that “Ray had numerous direct contacts with California, including 13 submission of a written response to the Monterey Project’s request for financing proposals, in 14 which he made numerous representations that Plaintiffs have alleged were fraudulent.” Pls.’ Opp. 15 to Def. Ray’s Suppl. Mem. at 1, ECF 231-4. However, paragraph 107 alleges that Ray provided a 16 written response to the request for financing proposals to the Monterey Project developer, Clark, 17 which is headquartered in Virginia. See SAC ¶¶ 2, 107. Paragraph 107 does not allege any direct 18 contacts with California. Plaintiffs cite paragraph 87 of the SAC to show that Ray had discussions 19 about the Monterey Project with Fran Coen, a resident of California. See Pls.’ Opp. to Def. Ray’s 20 Suppl. Mem. at 1, ECF 231-4. Paragraph 87 identifies “Fran Coen, Greg Day, and Tad 21 Guleserian” as “key principles” of the Monterey Project to whom misrepresentations were made, 22 but paragraph 87 alleges neither that Fran Coen is a resident of California nor that Ray spoke to 23 him. Plaintiffs point to their allegation that Ray traveled to California once in 2003 “in connection 24 with the scheme to defraud the Monterey Project.” SAC ¶ 67. Plaintiffs do not provide any 25 specifics regarding Ray’s 2003 California trip. See id. They do not allege that Ray made any 26 misrepresentations or signed any documents during the trip. See id. 27 28 Plaintiffs argue that Marfatia traveled to California with Ray for the purpose of closing the fraudulent loan on the Monterey Project, citing paragraphs 67-68 of the SAC. Paragraph 67 30 1 contains the allegations regarding Ray discussed above, and paragraph 68 contains similar 2 conclusory allegations regarding Marfatia. For example, paragraph 68 alleges that “in 2003, 3 Marfatia traveled to California in connection with the schemes to defraud the Projects and in an 4 effort to further the scheme to defraud the Monterey Project.” SAC ¶ 68. Plaintiffs do not allege 5 that the loan on the Monterey Project was closed on the California trip, or that any particular 6 misrepresentations were made on the California trip. 7 Plaintiffs allege that Jefferies acted as the loan servicer for the Monterey Project starting in 8 2009. SAC ¶ 66. However, Plaintiffs do not identify any claims of wrongdoing arising out of 9 Jefferies’ role as loan servicer. Plaintiffs allege that Jefferies deleted documents relevant to a litigation pending in the California state court. SAC ¶ 66. It appears from other paragraphs of the 11 United States District Court Northern District of California 10 complaint that the document deletion occurred in 2016, long after the last loan transaction at issue 12 closed in 2012. See SAC ¶¶ 244-47. It is entirely unclear how alleged document deletion in 2016 13 would have bearing on this Court’s personal jurisdiction over Jefferies for conduct occurring in 14 2009-2012. 15 In summary, neither Plaintiffs’ general allegations that Defendants “purposefully directed” 16 tortious conduct toward the Monterey, Vandenberg, and AMC West Projects in California, nor 17 their more specific allegations regarding Defendants’ conduct are sufficient to show that Ray, 18 Marfatia, or Jefferies expressly aimed their alleged tortious conduct at California. 19 iii. Causing Harm Likely to be Suffered in Forum State 20 The Ninth Circuit has “not decide[d] whether the effects test requires that the brunt of the 21 harm have occurred within the forum state, or merely that some significant amount of harm have 22 occurred there.” Dole Food Co. v. Watts, 303 F.3d 1104, 1113 (9th Cir. 2002). Under either 23 standard, Plaintiffs have failed to show that Defendants knew their conduct was likely to cause 24 harm in California. As noted above, the SAC asserts economic harm to non-citizen Plaintiffs 25 arising out of the financing of the military housing developments. See SAC ¶¶ 37-54. Plaintiffs 26 have not explained how that economic harm was suffered in California. They have not alleged 27 that the California housing developments were harmed in any way by Defendants’ alleged 28 misconduct, e.g., that construction was slowed or halted, or that the California properties 31 1 2 otherwise were diminished. Based on the foregoing, the Court concludes that under the effects test, Plaintiffs have 3 failed to show that the alleged tortious conduct of Defendants Marfatia, Jefferies, and Ray was 4 expressly aimed at California. 5 6 b. Arising out of Forum Activities Because Plaintiffs have failed to satisfy the first prong of the Schwarzenegger test, the Court need go no further before concluding that Plaintiffs have failed to meet their burden of 8 establishing personal jurisdiction over Defendants Marfatia, Jefferies, and Ray. See 9 Schwarzenegger, 374 F.3d at 802 (If the plaintiff fails to satisfy either of the first two prongs, 10 “personal jurisdiction is not established in the forum state.”). However, even if Plaintiffs had 11 United States District Court Northern District of California 7 satisfied the first prong, the Court concludes that Plaintiffs have failed to satisfy the second prong 12 because they have not shown that their claims arise out of Defendants’ forum-related activities. 13 In determining whether a plaintiff’s claim arises out of the defendant’s forum-related 14 activities, “the Ninth Circuit follows the ‘but for’ test.” Menken v. Emm, 503 F.3d 1050, 1058 (9th 15 Cir. 2007) (internal quotation marks and citation omitted). Thus, Plaintiffs must show that they 16 would not have suffered an injury “but for” Defendants’ forum-related conduct. See id. 17 With respect to Ray and Marfatia, Plaintiffs allege that they took a single trip to California 18 in 2003. See ECF ¶¶ 67-68. Plaintiffs argue in their briefing that that the 2003 visit was 19 important to the Monterey Project. See Pls.’ Opp. to Ray’s Suppl. Br. at 2, ECF 231-4. However, 20 Plaintiffs do not cite any allegations or evidence in support of their assertion regarding the 21 significance of the California trip. See id. 22 Plaintiffs cite two cases in support of their argument that the California trip is sufficient to 23 subject Ray and Marfatia to personal jurisdiction in California, GEC US 1 LLC v. Frontier 24 Renewables, LLC, No. 16-CV-1276 YGR, 2017 WL 605070 (N.D. Cal. Feb. 15, 2017), Precision 25 Orthopedic Implants, Inc. v. Limacorporate S.P.A., No. 2:16-cv-02945-ODW (PLA), 2016 WL 26 7187299 (C.D. Cal. Dec. 9, 2016). In both cases, the finding of personal jurisdiction depended on 27 facts that are not present here. In the cited portion of Frontier Renewables, the district court found 28 that a counterclaim defendant who “spearheaded” the allegedly fraudulent transfer actually 32 1 proposed the fraudulent transfer “at a meeting with Frontier in California in December 2015.” 2 Frontier Renewables, 2017 WL 605070, at *5. In Precision, the defendant signed a contract 3 containing alleged misrepresentations that was “specifically designed to induce Plaintiffs to render 4 distribution services within a specific territory of the forum state.” Precision, 2016 WL 7187299, 5 at *6. 6 In the present case, the SAC does not allege that Ray or Marfatia had any significant 7 meetings during the single California trip, signed any documents in California, or made any 8 fraudulent statements in California. See SAC ¶ 67. Ray cites to his prior declaration, in which he 9 stated that the 2003 trip was his only travel to California during the relevant 2002-2012 time frame, the trip lasted less than 24 hours, and he spent a portion of the trip playing a round of golf. 11 United States District Court Northern District of California 10 See Ray Decl. ¶¶ 13, 23, ECF 64-1. Ray also stated that all official correspondence and legal 12 notice related to the loan transaction with Monterey Bay Military Housing, LLC went to 13 “Monterey Bay Military Housing LLC, c/o Clark Realty Capital, L.L.C., 2 Bethesda Metro 14 Center, Suite 250, Mezzanine Level, Bethesda, MD 20814.” Id. ¶ 5. Ray indicated that he dealt 15 with the Army through individuals located in Virginia and Maryland. Id. ¶ 6. The Monterey 16 Project closing with the Army occurred in Colorado. Id. ¶ 12. 17 With respect to Jefferies, Plaintiffs allege that Jefferies acted as the loan servicer for the 18 Monterey Project starting in 2009. See SAC ¶ 66. However, Plaintiffs do not allege that Jefferies 19 had contacts with California as part of its servicing duties. See id. Nor do Plaintiffs allege that 20 their injuries arose from Jefferies’ servicing of the Monterey Project loan. See id. 21 Accordingly, the Court concludes that Plaintiffs have failed to meet their burden on the 22 second prong of the Schwarzenegger test to show that they would not have suffered an injury “but 23 for” Defendants’ forum-related conduct. That failure constitutes an independent basis for finding 24 that Plaintiffs have failed to make a prima facie showing of personal jurisdiction over Defendants, 25 separate and apart from Plaintiffs’ failure to satisfy the first prong of the Schwarzenegger test. 26 27 28 c. Reasonableness Because Plaintiffs have failed to satisfy their burden with respect to the first two prongs, the burden does not shift to Defendants to satisfy the third prong. See Schwarzenegger, 374 F.3d 33 1 at 802 (burden shifts to the defendant to show that exercise of personal jurisdiction would not be 2 reasonable only if the plaintiff satisfies both of the first two prongs). d. 3 The Court therefore concludes that Defendants Marfatia, Jefferies, and Ray are not subject 4 5 Conclusion to this Court’s personal jurisdiction under California’s long-arm statute.5 2. 6 18 U.S.C. § 1965(b) Plaintiffs also allege that personal jurisdiction lies under 18 U.S.C. § 1965(b). See SAC ¶¶ 7 8 62-63. Under 18 U.S.C. § 1965(b), a district court may exercise personal jurisdiction over non- 9 resident participants in an alleged RICO conspiracy, even if those parties otherwise would not be subject to the court’s jurisdiction, if “the ends of justice” so require. The “ends of justice” 11 United States District Court Northern District of California 10 provision permits a court, consistent with the purpose of the RICO statute, to “enable plaintiffs to 12 bring all members of a nationwide RICO conspiracy before a court in a single trial.” Butcher’s 13 Union Local No. 498, United Food & Comm. Workers v. SDC Inv., Inc., 788 F.2d 535, 538 (9th 14 Cir. 1986). In order for a court to exercise personal jurisdiction through the “ends of justice” 15 provision, “the court must have personal jurisdiction over at least one of the participants in the 16 alleged multi-district conspiracy and the plaintiff must show that there is no other district in which 17 a court will have personal jurisdiction over all of the alleged coconspirators.” Id. at 539. 18 Moreover, the plaintiff must allege facts showing the existence of “a single nationwide RICO 19 conspiracy” involving the defendants as to whom personal jurisdiction is asserted. Id. a. 20 Personal Jurisdiction over at Least One Alleged Conspirator and Allegation of a Single Nationwide RICO Conspiracy 21 The Court finds that Plaintiffs have satisfied the first and third requirements for application 22 23 of § 1965(b). With respect to the first requirement, Ambac concedes that this Court has personal 24 jurisdiction over it with respect to the claims of the Monterey Plaintiffs. See Defs.’ Joint Motion 25 26 27 28 While Ambac has conceded personal jurisdiction with respect to the Monterey Plaintiffs’ claims, the Court has no information regarding the basis for that concession and cannot infer from it the existence of minimum contacts as to the other Defendants. “A defendant may voluntarily consent or submit to the jurisdiction of a court which otherwise would not have jurisdiction over it.” King v. Am. Family Mut. Ins. Co., 632 F.3d 570, 584 (9th Cir. 2011). 34 5 1 at 24, ECF 223. With respect to the third requirement, the Court concludes that that Plaintiffs 2 have adequately alleged a single nationwide RICO conspiracy, as discussed above. b. 3 No Other District with Personal Jurisdiction over all Conspirators 4 Application of § 1965(b) therefore turns on the second requirement, which places the 5 6 burden on Plaintiffs to “show that there is no other district in which a court will have personal 7 jurisdiction over all of the alleged co-conspirators.” See Butcher’s Union, 788 F.2d at 539. In its 8 Prior Dismissal Order, the Court found that Plaintiffs failed to meet that burden in opposition to 9 the motions to dismiss the first amended complaint. See Prior Dismissal Order at 9, ECF 147. The Court now must determine whether Plaintiffs have made a better showing in 10 United States District Court Northern District of California 11 opposition to the current motion to dismiss the operative SAC. As noted above, Ambac, Marfatia, 12 and Jefferies indicated in their prior motions to transfer that they would be subject to general 13 personal jurisdiction in New York. Plaintiffs concede as much, alleging in the SAC that Ambac 14 has its principle place of business in New York, Marfatia is a resident of New York, and Jefferies 15 maintains its principle place of business in New York. See SAC ¶¶ 55-59. However, Plaintiffs 16 argue that the SDNY Court would not have personal jurisdiction over Ray and therefore would not 17 have personal jurisdiction over all the alleged conspirators. Plaintiffs rely primarily on the 18 allegations of the SAC to establish that Ray would not be subject to personal jurisdiction in New 19 York, alleging that Ray neither resided there nor worked on the Projects from there. See SAC ¶¶ 20 69-72. 21 Plaintiffs allege that Ray did no work on the MHPI projects from New York, based on the 22 following facts: “[D]espite the production of hundreds of thousands of transactional documents 23 and emails, not a single one reflects that Ray made a relevant communication to the Projects – 24 much less a misrepresentation or omission – from New York.” SAC ¶ 70. “[N]ot once did 25 Plaintiffs meet with Ray in New York, close a transaction in New York, call Ray in New York, or 26 receive a communication from Ray in New York.” SAC ¶ 70. Plaintiffs allege that when Ray 27 moved to Jefferies in 2009, he and his MHPI business had only two offices, located in Colorado 28 and Chicago. SAC ¶ 71. Ray Resided in South Carolina and maintained an office in Colorado. 35 1 SAC ¶ 71. All of Ray’s team members listed direct and mobile telephone numbers beginning with 2 a 303 area code specific to the area in and around Denver, Colorado. SAC ¶ 71. 3 Moreover, Plaintiffs allege that Ray did not pay any taxes in New York during the years 2002-2012. SAC ¶ 72. That fact is admitted by Ray. See Ray Decl. ¶ 10, ECF 224-1. Under 5 New York law, non-residents must pay income tax in the state with respect to any income 6 “‘derived from or connected with New York sources.’” Zelinsky v. Tax Appeals Tribunal of State, 7 1 N.Y.3d 85, 90 (2003) (quoting Tax Law § 601 [e][1]; § 631[a][1] ). “New York source income 8 includes income attributable to a business, trade, profession or occupation carried on in [New 9 York].” Id. (citing Tax Law § 631[b][1][B]). Thus, Plaintiffs argue, Ray’s failure to pay any New 10 York taxes during the period of the alleged RICO conspiracy suggests that Ray did no work on the 11 United States District Court Northern District of California 4 Projects in New York during that period. 12 Defendants counter the cited allegations of the SAC with Ray’s declaration dated February 13 15, 2019. See Ray Decl., ECF 224-1. Ray states that although he resided in Colorado and South 14 Carolina during the period 1999-2012, and primarily worked in those states, he “traveled on 15 occasion to New York City in connection with the Military Housing Privatization Initiative 16 (‘MHPI’) work” that he performed for GMAC, Capmark, and JeffCo. Ray Decl. ¶¶ 2-4. Ray also 17 states that he occasionally worked from the New York offices of GMAC, Capmark, and JeffCo. 18 during the time period 1999-2012. Ray Decl. ¶¶ 2-4. During those New York trips, Ray met with 19 the Projects’ senior representatives and co-owners as well as the Projects’ advisor, JLL. Ray Decl. 20 ¶ 5. Ray also met more than two dozen representatives of large institutional investors in New 21 York, to discuss marketing and sale of MHPI trust securities. Ray Decl. ¶ 6. During his trips to 22 New York, Ray also met with Ambac employees, including Marfatia, to discuss issues related to 23 the MHPI transactions. Ray Decl. ¶ 7. Ray had meetings in New York with individuals from 24 Moodys Investor Service, Standard and Poor’s Rating Service, and Fitch Rating Service to discuss 25 the MHPI transactions. Ray Decl. ¶ 8. Ray met in New York with insurance companies interested 26 in providing credit enhancement and Guaranteed Investment Contract services in connection with 27 the Projects. Ray Decl. ¶ 9. With respect to the fact that he did not pay taxes in New York during 28 the 2002-2012 period, Ray states that his W-2s received from GMAC, Capmark, and JeffCo. 36 1 during those years did not list a New York corporate entity as his employer, and his employers did 2 not withhold New York income taxes. Ray Decl. ¶ 10. 3 Ray’s declaration is sufficient to controvert Plaintiffs’ allegations that Ray did no work on 4 the Projects in New York. Plaintiffs contend that Ray’s declaration does not contain enough detail 5 to controvert the SAC’s allegations. See Pls.’ Opp. to Def. Ray’s Suppl. Mem. at 4, ECF 231-4. 6 The Court disagrees. Ray’s declaration provides the names of people and entities he met in New 7 York to discuss various aspects of the MHPI Projects, such as marketing MHPI trust securities, 8 credit ratings, and credit enhancement, as well as approximate dates of those meetings. The Court 9 finds that information sufficient to show Ray did significant work on the Projects in New York. As stated above, Plaintiffs attempt to show that Ray would not be subject to personal 11 United States District Court Northern District of California 10 jurisdiction in New York based on the SAC’s allegations that he did no work on the Projects there. 12 Because Ray has controverted those allegations, Plaintiffs may not rely on them to make a prima 13 facie showing that Ray would not be subject to personal jurisdiction in New York (and thus that 14 personal jurisdiction over all Defendants is proper under § 1965(b)). Plaintiffs must present 15 affidavits or other evidence sufficient to create a factual dispute as to whether Ray worked on the 16 Projects in New York. See Schwarzenegger, 374 F.3d at 800. 17 Plaintiffs attempt to create a factual dispute with the declaration of an expert on New York 18 State tax litigation, Timothy P. Noonan. See Noonan Decl., ECF 231-6. Mr. Noonan states his 19 opinion that an individual who worked in New York in the manner described by Ray’s declaration 20 would face potential exposure for New York tax, interest, and penalties in excess of $1 million. 21 Noonan Decl. ¶ 32. Mr. Noonan also opines that an individual who failed to pay such taxes could 22 be sued under the New York False Claims Act for more than $3 million. Noonan Decl. ¶ 33. Mr. 23 Noonan concludes by stating that “RAY’s specific exposure for New York tax, interest, and 24 penalties could be lower (or much higher) depending on his exact compensation amounts and the 25 specific amount of workdays in and out of New York each year.” Noonan Decl. ¶ 34. 26 While Mr. Noonan’s declaration may show that Ray failed to pay taxes in New York, Ray 27 concedes that he did not pay taxes in New York. Mr. Noonan’s declaration therefore does not 28 create any disputed facts. The declaration does not controvert Ray’s declaration describing the 37 1 work he did in New York on the Projects. Moreover, Plaintiffs cite no authority equating the 2 threshold required to incur New York tax liability with the minimum contacts required to establish 3 personal jurisdiction. 4 Plaintiffs argue that the Court should not credit Ray’s declaration because of his “past perjury and documented efforts to destroy evidence,” as alleged in the SAC. See Pls.’ Opp. to 6 Def. Ray’s Suppl. Mem. at 5, ECF 231-4. Plaintiffs’ reliance on Zamanov v. Holder, 649 F.3d 7 969 (9th Cir. 2011), is misplaced. Zamanov involved review of an Immigration Judge’s credibility 8 determination with respect to a non-citizen’s asylum application. The Ninth Circuit held that 9 “[s]ubstantial evidence supported the immigration judge’s conclusion that the additional incidents 10 Zamanov described in his supplemental declaration materially altered his account of persecution 11 United States District Court Northern District of California 5 and created inconsistencies in his testimony that cast doubt on his credibility.” Id. at 974. 12 Nothing in the case supports the notion that this Court may simply disregard Ray’s declaration. 13 It is not the Court’s task to make credibility determinations when evaluating a challenge to 14 personal jurisdiction, but rather to determine whether Plaintiffs have made a prima facie showing 15 of personal jurisdiction, assuming that all conflicts in the evidence are resolved in Plaintiffs’ favor. 16 See Schwarzenegger, 374 F.3d at 800. Here, there are no conflicts in the evidence because Ray’s 17 declaration statements regarding his work on the Projects in New York stands uncontradicted. c. 18 19 Conclusion The Court concludes that Plaintiffs have failed to meet their burden to show that no other 20 district that would have personal jurisdiction over all alleged conspirators. Specifically, Plaintiffs 21 concede that Defendants Marfatia, Jefferies, and Ambac would be subject to personal jurisdiction 22 in New York, and they have failed to demonstrate that Ray would not also be subject to personal 23 jurisdiction in New York. As a result, Plaintiffs have not made the showing required to permit this 24 Court to exercise personal jurisdiction over all Defendants under § 1965(b). 25 26 3. Pendent Personal Jurisdiction In response to Defendants’ argument that the majority of Plaintiffs’ claims are foreclosed 27 by Bristol-Myers Squibb, 137 S. Ct. 1773, Plaintiffs argue that to the extent the Court finds the 28 existence of personal jurisdiction with respect to any claims, the Court may exercise “pendent 38 1 personal jurisdiction” with respect to all other claims in the suit. Defendants argue that application 2 of the doctrine of pendent personal jurisdiction is not appropriate in this case. 3 “Personal jurisdiction must exist for each claim asserted against a defendant.” Action Embroidery Corp. v. Atl. Embroidery, Inc., 368 F.3d 1174, 1180 (9th Cir. 2004). However, under 5 the doctrine of pendent personal jurisdiction, “a court may assert pendent personal jurisdiction 6 over a defendant with respect to a claim for which there is no independent basis of personal 7 jurisdiction so long as it arises out of a common nucleus of operative facts with a claim in the 8 same suit over which the court does have personal jurisdiction.” Id. “Pendent personal 9 jurisdiction is typically found where one or more federal claims for which there is nationwide 10 personal jurisdiction are combined in the same suit with one or more state or federal claims for 11 United States District Court Northern District of California 4 which there is not nationwide personal jurisdiction.” Id. at 1180-81. 12 In Action Embroidery, the Ninth Circuit applied the doctrine where the plaintiffs asserted 13 federal antitrust claims which were subject to the court’s jurisdiction, and related state law claims, 14 which were not. Action Embroidery, 368 F.3d at 1180. The Ninth Circuit held that “[w]hen a 15 defendant must appear in a forum to defend against one claim, it is often reasonable to compel that 16 defendant to answer other claims in the same suit arising out of a common nucleus of operative 17 facts.” Id. at 1181. The Ninth Circuit stated that “the actual exercise of personal pendent 18 jurisdiction in a particular case is within the discretion of the district court.” Id. “The district 19 court may have discretion to dismiss the pendent claims where considerations of judicial 20 economy, convenience and fairness to litigants so dictate.” Id. (internal quotation marks, citation, 21 and alteration omitted). 22 While Action Embroidery involved claims asserted by the same plaintiffs against the same 23 defendant, at least two district courts within the Northern District of California have extended the 24 pendent personal jurisdiction doctrine to out-of-state plaintiffs in a putative nationwide class 25 action. See Allen v. ConAgra Foods, Inc., No. 3:13-CV-01279-WHO, 2018 WL 6460451, at *7-8 26 (N.D. Cal. Dec. 10, 2018); Sloan v. Gen. Motors LLC, 287 F. Supp. 3d 840, 860 (N.D. Cal. 2018). 27 Those courts distinguished putative class actions from mass actions like that addressed in Bristol- 28 Myers Squibb, reasoning that where the defendant already was before the court to defend against 39 1 some plaintiffs’ claims, the additional burden of defending against out-of-state plaintiffs’ claims 2 was de minimis. See Allen, 2018 WL 6460451, at *8 (“Further, ConAgra is already before this 3 court to defend against Allen’s claims, and the additional burden is de minimis.”); Sloan, 287 F. 4 Supp. 3d at 860 (“[T]he exercise of personal jurisdiction over the non-resident Plaintiffs’ claims in 5 this case will impose only a de minimis burden on GM. . . . Those new claims overlap 6 substantially with the claims (including federal claims) already before this Court, arising out of the 7 same nucleus of operative facts.”). The only defendant subject to the Court’s personal jurisdiction is Ambac. Because Ambac 8 has conceded personal jurisdiction with respect to the Monterey Plaintiffs’ claims, the doctrine of 10 pendent personal jurisdiction potentially could provide a basis for exercising jurisdiction over the 11 United States District Court Northern District of California 9 other Plaintiffs’ claims against Ambac as well. However, the Court would have grave reservations 12 about applying the doctrine on the facts of this case, in which each of the Plaintiffs engaged in 13 separate and distinct transactions with Defendants. In that sense, this case is more akin to the 14 mass actions discussed in Bristol-Myers Squibb than the putative class actions discussed in Sloan 15 and Allen. Moreover, Sloan and Allen do not suggest that the Court’s personal jurisdiction over 16 Plaintiffs’ claims against Ambac could confer personal jurisdiction over Plaintiffs’ claims against 17 other Defendants. Thus, to the extent the Court may have discretion to exercise pendent personal 18 jurisdiction in this case, it declines to do so given the multiplicity of Projects and parties. See 19 Allen, 2018 WL 6460451, at *7 (“[D]istrict courts have discretion to decide whether or not to 20 exercise pendent jurisdiction.”); Sloan, 287 F. Supp. 3d at 860 (“Whether to exercise pendent 21 personal jurisdiction is afforded to the discretion of the district court.”). 4. 22 Transfer in Lieu of Partial Dismissal Given the Court’s conclusions that it has personal jurisdiction over only one of the four 23 24 Defendants,6 and that all Plaintiffs may not be able to proceed in this forum even against Ambac, 25 the Court sua sponte reconsiders its denial of the prior motion to transfer the case to the SDNY 26 Court under 28 U.S.C. § 1404(a). See Prior Order Denying Transfer, ECF 108. A district court 27 28 6 Again, the Court treats the four Jefferies entities as a single Defendant for ease of discussion. 40 1 may transfer a case sua sponte under § 1404(a). See Pravetz v. Fed. Ret. Thrift Inv. Bd., No. ED 2 CV 18-1081 FMO (SKx), 2018 WL 8058843, at *2 (C.D. Cal. Dec. 28, 2018). The Court 3 nonetheless ordinarily would obtain briefing from the parties prior to making a sua sponte 4 determination regarding transfer. In this case, however, the parties submitted ample briefing and 5 supplemental briefing on the prior § 1404(a) motions. See ECF 39, 40, 47, 48, 49, 50, 54, 63, 88, 6 89, 91, 92, 99. The Court’s purpose in reconsidering its denial of the prior transfer motion is to 7 determine whether the balance of factors is altered by the change in the procedural posture of the 8 case, namely, the Court’s rulings on personal jurisdiction. The Court concludes that additional 9 briefing from the parties would not aid the Court in revisiting the balance of factors. Transfer may be ordered under 28 U.S.C. § 1404(a) where the transferor court lacks 11 United States District Court Northern District of California 10 personal jurisdiction over all the parties. See Quiroz v. Dickerson, 714 F. App’x 646, 646 (9th Cir. 12 2017); Microsoft Corp. v. Hagen, No. CIV–F–09–2094 AWI GSA, 2010 WL 11527312, at *1 13 (E.D. Cal. Aug. 30, 2010). The Ninth Circuit has expressly recognized that a case may be 14 transferred under § 1404(a) to cure a lack of personal jurisdiction in the transferor court. See 15 Muldoon v. Tropitone Furniture Co., 1 F.3d 964, 967 (9th Cir. 1993). 16 Section 1404(a) provides that: “For the convenience of parties and witnesses, in the 17 interest of justice, a district court may transfer any civil action to any other district or division 18 where it might have been brought or to any district or division to which all parties have 19 consented.” 28 U.S.C. § 1404(a). A two-part test governs transfer under § 1404(a). See Ctr. For 20 Biological Diversity v. McCarthy, No. 14-cv-5138, 2015 WL 1535594, at *2 (N.D. Cal. Apr. 6, 21 2015) (citing Hatch v. Reliance Ins. Co., 758 F.2d 409 (9th Cir. 1985)). First, the court considers 22 whether the case could have been brought in the proposed transferee district. Id. Second, if the 23 case could have been brought in the transferee district, the court considers whether the case should 24 be moved “for convenience of parties and witnesses [and] in the interest of justice.” Id. “[T]he 25 district court has discretion to adjudicate motions for transfer according to an individualized, case- 26 by-case consideration of convenience and fairness.” Jones v. GNC Franchising, Inc., 211 F.3d 27 495, 498 (9th Cir. 2000) (internal quotation marks and citation omitted). 28 41 a. 1 The Action Could have Been Brought in the SDNY When addressing the prior motions to transfer, the Court determined that the action could 2 3 have been brought in the SDNY based in part on the agreement of the moving parties and 4 Plaintiffs that the SDNY Court could exercise personal jurisdiction over all Defendants pursuant 5 to the RICO “ends of justice provision,” 18 U.S.C. § 1965(b). See Prior Order Denying Transfer 6 at 5-6, ECF 108. The Court accepted the parties’ characterization of the SDNY Court as a proper 7 forum for the action based on the allegations of the then-operative pleading. See Prior Order 8 Denying Transfer at 6. Although the Court acknowledged that Defendants had filed motions to 9 dismiss for lack of personal jurisdiction, and had specifically challenged Plaintiffs’ reliance on § 1965(b) to confer personal jurisdiction here, the Court found that those arguments were not yet 11 United States District Court Northern District of California 10 properly before it. See id. at 6 n.2. In light of the subsequent evolution of the case, and in particular Plaintiffs’ current position 12 13 that Ray would not be subject to personal jurisdiction in the SDNY, the Court finds it prudent to 14 satisfy itself that the action could have been brought in the SDNY Court. The Supreme Court has 15 interpreted the “might have been brought” language of § 1404(a) to refer to “forums . . . permitted 16 by federal venue statutes.” Atl. Marine Const. Co. v. U.S. Dist. Court for W. Dist. of Texas, 571 17 U.S. 49, 57 (2013) (internal quotation marks and citation omitted). “The structure of the federal 18 venue provisions confirms that they alone define whether venue exists in a given forum.” Id. at 19 56. 20 Under the general venue statute, 28 U.S.C. § 1391, “[a] civil action may be brought in – 21 (1) a judicial district in which any defendant resides, if all defendants are residents of the State in 22 which the district is located; (2) a judicial district in which a substantial part of the events or 23 omissions giving rise to the claim occurred, or a substantial part of property that is the subject of 24 the action is situated; or (3) if there is no district in which an action may otherwise be brought as 25 provided in this section, any judicial district in which any defendant is subject to the court’s 26 personal jurisdiction with respect to such action.” 28 U.S.C. § 1391(b). If a case falls within one 27 of those three categories, “venue is proper.” Atl. Marine, 571 U.S. at 56; see also In re Bozic, 888 28 F.3d 1048, 1053 (9th Cir. 2018) (applying 28 U.S.C. § 1391(b) to determine whether an action 42 1 2 “might have been brought” in the proposed transferee forum as required under § 1404(a)). The first category clearly does not apply, because Ray is not a resident of the state of New 3 York. However, the Court finds that the second category does apply, as a substantial part of the 4 events or omissions giving rise to Plaintiffs’ claims occurred in the SDNY. Ambac and Jefferies 5 maintain their principle places of business in New York City (within the SDNY) and thus are 6 subject to general personal jurisdiction there. See SAC ¶¶ 55-59. Marfatia is a resident of New 7 York. See SAC ¶ 61. Marfatia, who was the primary person at Ambac responsible for the 8 Projects, worked in Ambac’s office in New York City. See Mayer Decl. at 5, ECF 40. Ray, who 9 resided in Colorado and South Carolina during the events giving rise to this suit, performed substantial work on the Projects in New York City. See Ray Decl. ¶¶ 2-9, ECF 224-1. Thus it 11 United States District Court Northern District of California 10 appears that the alleged RICO conspiracy was operated at least in part from the SDNY. Even if 12 the second category did not apply, the third category would, as there is no other district falling 13 within the first or second categories, and at least one defendant is subject to personal jurisdiction 14 in the SDNY. 15 Accordingly, the Court is satisfied that the action could have been brought in the SDNY. 16 In reaching that conclusion, the Court need not and does not determine whether Ray would be 17 subject to personal jurisdiction in the SDNY. As discussed above, category 2 makes no reference 18 to personal jurisdiction over defendants, and category 3 requires personal jurisdiction in the 19 transferee forum as to only one defendant. Nothing in this order is intended to preclude Ray from 20 challenging personal jurisdiction under New York’s long arm statute in a future motion, if 21 appropriate. 22 23 b. Convenience and Interests of Justice The Court next turns to part two of the test, which requires a balancing of the convenience 24 of the parties, the convenience of the witnesses, and the interests of justice. In determining the 25 interest of justice, courts consider a wide variety of factors. See Dillon v. Murphy & Hourihane, 26 LLP, No. 14-CV-01908, 2014 WL 5409040, at *13 (N.D. Cal. Oct. 22, 2014). In particular, courts 27 may consider: (1) the location where the relevant agreements were negotiated and executed, 28 (2) the state that is most familiar with the governing law, (3) the plaintiff’s choice of forum, (4) the 43 1 respective parties’ contacts with the forum, (5) the contacts relating to the plaintiff’s cause of 2 action in the chosen forum, (6) the differences in the costs of litigation in the two forums, (7) the 3 availability of compulsory process to compel attendance of unwilling non-party witnesses, and 4 (8) the ease of access to sources of proof. Id. (quoting Jones, 211 F.3d at 498). 5 The Court addressed those factors at length when ruling on the prior motions to transfer. 6 See Prior Order Denying Transfer at 6-19, ECF 108. Based on the parties’ submissions, the Court 7 weighed these factors as follows: 8 9 10 United States District Court Northern District of California 11 12 13 14 For the foregoing reasons, the Court finds that Plaintiffs’ choice of forum is entitled to great weight and disfavors transfer. On the other hand, the presence of the 22 witnesses identified by Ambac and the availability of compulsory process to compel unwilling non-party witnesses slightly favor transfer. Other factors are neutral. The Court concludes that balancing of the factors does not warrant transfer to the Southern District of New York because Plaintiffs’ choice of forum is entitled to deference that outweighs other factors. Ambac has failed to satisfy its burden to demonstrate that balancing the factors “clearly favors transfer” to the Southern District of New York. Prior Order Denying Transfer at 19. The briefing on the current motion does not suggest any reason to reconsider the Court’s 15 determinations regarding the weight to be accorded the convenience of witnesses or the 16 availability of compulsory process. However, the Court does reconsider its previous finding that 17 the convenience of the parties was neutral. When it made that finding, the Court had not yet 18 evaluated Defendants’ challenges to personal jurisdiction, and it evaluated the convenience of the 19 parties based on an assumption that the entire action could be litigated against all Defendants in 20 either the Northern District of California or the SDNY. See Prior Order Denying Transfer at 15. 21 The Court found that because only some Defendants resided in New York, and Plaintiffs are 22 dispersed throughout the country, “transferring the case would merely shift the inconvenience 23 between some defendants and plaintiffs.” Id. 24 The Court’s current rulings with respect to personal jurisdiction change that analysis 25 significantly. Now, denying transfer would require piecemeal litigation of the action in multiple 26 fora. In contrast, the majority – and potentially all – of the Defendants would be subject to suit in 27 the SDNY. While this Court has not made an affirmative determination that Ray would be subject 28 to personal jurisdiction in New York, he may well be based on the work he performed on the 44 1 Projects there, as described in his declaration. Because New York is now the only potential forum 2 where the action could be litigated against all, or a majority, of Defendants, the Court now 3 concludes that the convenience of the parties favors transfer. For similar reasons, the Court’s rulings regarding personal jurisdiction change the weight 4 5 accorded to Plaintiffs’ choice of forum. The Court previously found that Plaintiffs had 6 demonstrated that this forum had a substantial connection with the case. See Prior Order Denying 7 Transfer at 10. However, that finding is not supported by the current record, discussed above, 8 which is virtually devoid of any connections between Defendants and California. Plaintiffs’ 9 choice of forum cannot be effectuated with respect to the bulk of the action, because most Defendants are not subject to personal jurisdiction here. Additionally, it is far from clear that all 11 United States District Court Northern District of California 10 Plaintiffs could pursue their claims here even as to Ambac. Under these changed circumstances, 12 the Court finds that Plaintiffs’ choice of forum no longer can be given substantial weight. This is 13 particularly true given that considerations of judicial economy strongly favor transfer. “A 14 plaintiff’s choice of forum is entitled to deference, but where the interest of justice and 15 convenience strongly favor venue elsewhere, a transfer is appropriate.” Friedman v. PopSugar, 16 Inc., No. 2:18-cv-05888-CAS(MAAx), 2018 WL 6016963, at *11 (C.D. Cal. Oct. 29, 2018). Having reconsidered its prior denial of the motions to transfer in light of the change in the 17 18 case’s procedural posture, the Court concludes that transfer of the action to the SDNY under § 19 1404(a) is warranted based on the convenience of the witnesses, the convenience of the parties, 20 judicial economy, and the interests of justice. 21 5. Conclusion 22 The Rule 12(b)(2) motion is DENIED and the action is TRANSFERRED to the District 23 Court for the SDNY under 28 U.S.C. § 1404(a). 24 // 25 // 26 // 27 // 28 // 45 1 2 IV. ORDER (1) is DENIED. 3 4 Defendants’ motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) (2) Defendants’ motion to dismiss for lack of personal jurisdiction pursuant to Rule 5 12(b)(2) is DENIED. While Defendants’ motion is well-taken with respect to 6 Defendants Marfatia, Jefferies, and Ray, the Court finds it appropriate to transfer 7 the entire action to the District Court for the SDNY rather than grant the Rule 8 12(b)(2) motion in part. 9 (3) The Court sua sponte reconsiders its denial of the prior motions to transfer under 28 U.S.C. § 1404(a), and in light of changed circumstances the motion to transfer is 11 United States District Court Northern District of California 10 GRANTED. The action is hereby TRANSFERRED to the District Court for the 12 Southern District of New York. 13 (4) Defendants shall file answers to the SAC no later than 30 days after the transfer is 14 effected and the case is docketed in the District Court for the Southern District of 15 New York. 16 17 18 19 Dated: September 26, 2019 ______________________________________ BETH LABSON FREEMAN United States District Judge 20 21 22 23 24 25 26 27 28 46

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