Golden State Equity Investors, Inc. v. Alliance Creative Group, Inc.
Filing
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ORDER Denying Defendant's 6 Motion to Dismiss for Failure to State a Claim. Signed by Judge Michael M. Anello on 4/7/2017. (ag)
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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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GOLDEN STATE EQUITY
INVESTORS, INC.
v.
ORDER DENYING DEFENDANT’S
MOTION TO DISMISS FOR
FAILURE TO STATE A CLAIM
ALLIANCE CREATIVE GROUP, INC.
[Doc. No. 6]
Plaintiff,
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Case No.: 16cv1694-MMA (DHB)
Defendant.
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Plaintiff Golden State Equity Investors, Inc. filed the First Amended Complaint
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(“FAC”) on September 1, 2016, against Defendant Alliance Creative Group, Inc. alleging
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a breach of contract. See Doc. No. 5, p. 7. Defendant now moves to dismiss the FAC for
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failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil
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Procedure 12(b)(6). See Doc. No. 6, p. 1. The Court took the matter under submission
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on the briefs and without oral argument pursuant to Civil Local Rule 7.1.d.1. See Doc.
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No. 11. For the reasons set forth below, the Court DENIES Defendant’s motion to
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dismiss.
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16cv1694-MMA(DHB)
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I. BACKGROUND
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Because this matter is before the court on a motion to dismiss, the Court must
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accept as true the allegations set forth in the FAC, but in doing so, does not make any
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findings of fact. See Hosp. Bldg. Co. v. Trs. Of Rex Hosp., 425 U.S. 738, 740 (1976).
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Plaintiff alleges the following.
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i.
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Plaintiff is an investment company focused on private money lending. See FAC ¶
Overview
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1. Defendant is a digital engagement company “engaged in the business of creative
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packaging.” See FAC ¶ 2. Plaintiff and Defendant “have been in a contractual
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relationship for the past twelve (12) years.” See Doc. No. 6-1, p. 2.
Specifically, on April 27, 2004, the parties entered into two agreements whereby
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Plaintiff invested $300,000.00 into Defendant’s company in exchange for interest
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repayments and rights to purchase 3,000,000 shares of Common Stock. See FAC ¶ 7.
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The first agreement (“Original Note”) stated that, starting on June 15, 2004, Defendant
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would pay 7 ¾ per annum interest rate on Plaintiff’s $300,000.00 investment until the
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principal amount was paid in full. See FAC, Exh. C. The Original Note’s maturity date
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was initially April 27, 2006. See FAC, Exh. C. The second agreement (“Warrant to
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Purchase Common Stock” or “Warrant”) allowed Plaintiff the right to purchase
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3,000,000 shares of Defendant’s Common Stock. See FAC, Exh. B. The Warrant’s
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expiration date was initially April 27, 2006. See FAC, Exh. B.
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Seven years later, on April 25, 2011, the parties entered into an “Addendum” with
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new terms. See FAC, Exh. D. The Addendum “extended the maturity date of the
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Original Note and the expiration date of the Warrant to April 25, 2012.” See FAC ¶ 10;
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see also Doc. No. 6-1, p. 2. The Addendum further acknowledged that $143,847.00 of
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the principal balance remained outstanding under the Original Note. See FAC, Exh. D.
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On March 18, 2013, the parties then entered into an “Exchange Agreement”
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whereby the Original Note (and its 7 ¾ per annum rate) was exchanged for a “New Note”
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in which Defendant agreed to pay Plaintiff the remaining outstanding balance of
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$143,312.00 at a lower 3 ¾ per annum interest rate. See FAC, Exh. E. The Exchange
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Agreement provided for Defendant to issue Common Stock to Plaintiff pursuant to the
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New Note’s terms. See id. at §2.21 (stating “[Defendant] shall honor all conversions of
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the New Note and shall deliver Underlying Shares in accordance with the terms,
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conditions and time periods set forth therein”); see also id. at §2.04 (stating “[a]ny
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Underlying Shares, when issued in accordance with the terms of the New Note will be
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duly and validly issued . . .”).
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The New Note’s terms, signed by the parties on March 31, 2013, extended the
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maturity date of the principal outstanding balance to March, 6, 2018. See FAC, Exh. A.
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Furthermore, Section 3.1 in the New Note states “at the option of the Holder [Plaintiff],
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this Debenture may be converted, either in whole or in part, up to the full Principal
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Amount . . . into [Defendant’s] Common Shares . . . .” See FAC, Exh. A. The New Note
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also contains various provisions outlining the terms of conversions or transfers of
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Common Stock to the Plaintiff. See FAC, Exh. A, art. 3 (titled “Conversion of
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Debenture”).
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On March 21, 2014, after the Exchange Agreement and New Note were signed,
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Plaintiff elected to purchase 100,000 shares of Defendant’s Common Stock by sending
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Defendant a document titled “Warrant Notice of Exercise.” See FAC, Exh. F. This
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document’s subject line stated “Warrant Notice,” and the request included a PDF
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attachment titled “ACGX Warrant Exercise 032114.” See id. Moreover, the document
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stated Plaintiff made the request “pursuant to the terms of the Warrant to Purchase
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Common Stock (Conversion Warrants) issued by [Defendant] to [Plaintiff].” See id.
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(emphasis added). According to this request, Plaintiff paid “$50,000 as cash and $50,000
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as a debit against the existing warrant credit balance” for Defendant’s Common Stock.
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See id. Defendant accepted the payments and “issued the shares requested by Plaintiff”
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based on “the existing warrant credit balance.” See id.; see also Doc. No. 10, p. 4.
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On April 20, 2016, Plaintiff sent Defendant another Conversion Notice exercising
Plaintiff’s “option to convert $2,500 Principal Amount of the [New Note] into shares of
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[Defendant’s] Common Stock.” See FAC, Exh. G. Plaintiff contends it made this
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Conversion Notice pursuant to Section 3.1 of the New Note. See FAC ¶ 18. When
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Defendant failed to deliver the shares, Plaintiff sent a demand letter to Defendant
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pursuant to section 3.2(b) of the New Note seeking “cash at 120% of the principal
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amount . . . plus the outstanding Warrant Credit balance.” See FAC ¶ 20. Defendant did
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not make these payments.
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As a result, Plaintiff filed this action for breach of contract. Plaintiff alleges two
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theories of liability. First, Plaintiff contends that, despite that the Exchange Agreement
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did not expressly extend the Warrant’s expiration date, the parties’ subsequent conduct
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impliedly extended the Warrant’s expiration date. Thus, Defendant breached that implied
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agreement when it failed to deliver the shares requested on April 20, 2016. Second,
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Plaintiff contends Defendant breached the New Note when it refused to deliver the shares
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or provide cash pursuant to Plaintiff’s demand letter. See FAC ¶¶ 25-28. Defendant
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contends the Court should dismiss Plaintiff’s action for four reasons: (1) Plaintiff fails to
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attach a valid Warrant agreement as an exhibit; (2) Plaintiff fails to allege a breach under
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the New Note; (3) the New Note is invalid; and (4) the Statute of Frauds precludes
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liability. See Doc. No. 6-1, pp. 2, 3, 6, 8.
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II. LEGAL STANDARD
A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro
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v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A pleading must contain “a short and plain
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statement of the claim showing that the pleader is entitled to relief. . . .” Fed. R. Civ. P.
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8(a)(2). However, plaintiffs must also plead “enough facts to state a claim to relief that is
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plausible on its face.” Fed. R. Civ. P. 12(b)(6); Bell Atl. Corp. v. Twombly, 550 U.S. 544,
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570 (2007). That is, the pleadings must contain factual allegations “plausibly suggesting
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(not merely consistent with)” a right to relief. Twombly, 550 U.S. at 545. The
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plausibility standard thus demands more than a “formulaic recitation of the elements of a
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cause of action,” or “naked assertions devoid of further factual enhancement.” Ashcroft
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v. Iqbal, 556 U.S. 662, 678 (2009). Instead, the complaint “must contain allegations of
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underlying facts sufficient to give fair notice and to enable the opposing party to defend
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itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011).
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In reviewing a motion to dismiss under Rule 12(b)(6), courts must assume the truth
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of all factual allegations and must construe them in the light most favorable to the
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nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir. 1996).
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The court need not take legal conclusions as true merely because they are cast in the form
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of factual allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987).
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Similarly, “conclusory allegations of law and unwarranted inferences are not sufficient to
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defeat a motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). In
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determining the propriety of a Rule 12(b)(6) dismissal, courts generally may not look
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beyond the complaint for additional facts. United States v. Ritchie, 342 F.3d 903,
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908 (9th Cir. 2003). “A court may, however, consider certain materials—documents
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attached to the complaint, documents incorporated by reference in the complaint, or
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matters of judicial notice—without converting the motion to dismiss into a motion for
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summary judgment.” Id. Where dismissal is appropriate, a court should grant leave to
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amend unless the plaintiff could not possibly cure the defects in the pleading.
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Knappenberger v. City of Phoenix, 566 F.3d 936, 942 (9th Cir. 2009).
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III. Discussion
A.
Timeliness of Defendant’s Motion to Dismiss
As an initial matter, Plaintiff contends that this Court should not consider
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Defendant’s motion to dismiss because Defendant filed the motion one day after the
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applicable deadline expired. See Doc. No. 8, p. 2; see also Fed. R. Civ. P. 12(a)(1);
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15(a)(3); 6(a). Generally, public policy favors disposition of cases on their merits. See
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Hernandez v. City of El Monte, 138 F.3d 393, 399 (9th Cir. 1998). Coincidentally, the
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docket reflects that Plaintiff’s FAC was also untimely by one day. See Doc. No. 5; see
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also Fed. R. Civ. P. 15(a)(1)(B) (dictating a 21-day deadline). This situation requires the
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Court to take an equitable approach and allow the case to proceed on the merits.
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Therefore, the Court deems both Plaintiff’s FAC and Defendant’s motion to dismiss to be
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timely, and considers Defendant’s motion to dismiss on the merits. See Pioneer
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Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 395
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(1993).
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B.
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Breach of Contract Under California Law
Under California law, “[a] cause of action for breach of contract requires proof of
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the following elements: (1) existence of the contract; (2) plaintiff’s performance or
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excuse for nonperformance; (3) defendant’s breach; and (4) damages to plaintiff as a
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result of the breach.” See CDF Firefighters v. Maldonado, 158 Cal. App. 4th 1226, 1239
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(2008). Likewise, “[a] cause of action for breach of implied contract has the same
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elements as does a cause of action for breach of contract, except that the promise is not
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expressed in words but is implied from the promisor’s conduct.” See Yari v. Producers
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Guild of Am., Inc., 161 Cal. App. 4th 172, 182, 73 Cal. Rptr. 3d 803, 811 (2008).
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C.
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Plaintiff’s Implied Contract Theory
Plaintiff first contends the terms of the Warrant are valid and enforceable because
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the parties’ conduct following the Exchange Agreement created an implied-in-fact
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contract extending the Warrant’s expiration date. See FAC ¶¶ 25-28. By accepting
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payments “as a debit against the existing warrant credit balance” and “pursuant to the
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terms of the Warrant to Purchase Common Stock,” Plaintiff contends Defendant’s
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conduct constituted an implied agreement to extend the Warrant. See FAC ¶ 12, n. 1.
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Therefore, it appears that one of Plaintiff’s theories of liability is that Defendant breached
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the Warrant when it failed to deliver shares in response to Plaintiff’s April 20, 2016
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Conversion Notice. See FAC ¶ 20. Regarding Plaintiff’s implied contract theory,
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Defendant argues the Warrant expired on April, 25, 2012, and was “never renewed.” See
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Doc. No. 6-1, p. 2.
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i.
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Defendant contends this Court should dismiss the FAC because Plaintiff
Plaintiff sufficiently alleges the terms of an implied agreement.
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“inexplicably failed to attach a copy . . . or recite verbatim the material provisions” of a
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valid Warrant agreement because the Warrant agreement that Plaintiff includes as part of
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its FAC is expired. See Doc. No. 6-1, p. 5. The argument that a plaintiff must attach a
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copy of a contract or recite its terms verbatim in order to state a claim for breach of
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contract has been squarely rejected by California courts. See Miles v. Deutsche Bank
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National Trust Co., 236 Cal. App. 4th 394, 402 (2015). For example, in Miles, the court,
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following the California Supreme Court’s ruling in Construction Protective Services, Inc.
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v. TIG Specialty Ins. Co., 29 Cal. 4th 189, 199 (2002), rejected that very argument and
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stated that a plaintiff may “plead the legal effect of the contract rather than its precise
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language.” Miles, 236 Cal. App. 4th at 402. Attaching a copy or reciting verbatim the
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material provision of a valid agreement is not “the exclusive means of pleading a
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contract.” Id. (emphasis added).
Rather, and applicable here in an implied contract dispute, courts must look to see
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if the plaintiff pleads the agreement according to its legal effect. Defendant asserts
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Plaintiff has not done so sufficiently because the FAC “fail[s] to fully describe the terms
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of said Warrant agreement,” and thus, the Court “cannot fully understand what the
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alleged relationship of the parties was.” See Doc. No. 6-1, p. 8. Defendant further
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alleges there are no “reasonable details” of a valid Warrant in Plaintiff’s FAC. See Doc.
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No. 6-1, p. 7. Plaintiff, however, alleges that the only implied term of the Warrant is that
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the expiration date was extended by the parties’ conduct. See FAC ¶ 12, n. 1; see also
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Doc. No. 8, p. 8. In other words, all other terms of the Warrant agreement that the parties
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entered into in 2006 remain the same. The purpose of the Warrant appears to be to give
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Plaintiff a right to purchase Defendant’s common stock. See FAC, Exh. B. Therefore,
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the Court must examine whether Plaintiff’s FAC contains reasonable details suggesting
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the parties’ conduct intended to extend the Warrant’s expiration date. See Goodrich &
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Pennington Mort. Fund, Inc. v. Chase Home Finance, LLC, No. 05-CV-636-JLS, 2008
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WL 698464, at *7 (S.D. Cal. Mar. 14, 2008).
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A contract may either be express or implied. “An implied contract is one, the
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existence and terms of which are manifested by conduct.” Cal. Civ. Code §1621; see
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also Foley v. Interactive Data Corp., 47 Cal. 3d 654, 677 (1988) (“Generally, courts seek
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to enforce the actual understanding of the parties to a contract, and in so doing may
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inquire into the parties’ conduct to determine if it demonstrates an implied contract.”).
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“Such implied-in-fact contract terms ordinarily stand on equal footing with express
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terms.” Foley, 47 Cal. 3d at 677; see also Northstar Financial Advisors Inc. v. Schwab
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Investments, 799 F.3d 1036, 1054 (9th Cir. 2015) (finding the parties’ conduct and the
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defendant’s “representations” that the defendant would perform created the terms of an
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implied contract). As to the basic elements of a contract cause of action, “there is no
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difference between an express and implied contract.” See Division of Labor Law
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Enforcement v. Transpacific Transportation Co., 69 Cal. App. 3d 268, 275 (1997).
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“While an implied in fact contract may be inferred from the conduct, situation or mutual
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relations of the parties, the very heart of this kind of agreement is an intent to promise.”
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Id. Depending on the facts, the parties’ conduct can demonstrate the required “meeting
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of minds or an agreement” just as much as words on paper. See Caron v. Andrew, 133
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Cal. App. 2d 412, 417 (1955); see also Desny v. Wilder, 46 Cal. 2d 715, 736 (1956) (“If
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made in fact, contracts may be established by direct evidence or they may be inferred
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from circumstantial evidence.”). The existence of an implied contract based on the
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circumstances “is clearly a question of fact.” See Del E. Webb Corp. v. Structural
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Material Co., 123 Cal. App. 3d 593, 611 (1981).
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In Goodrich & Pennington, the defendant, involved in a loan dispute with the
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plaintiff, moved to dismiss the plaintiff’s breach of contract action for failing to allege a
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valid implied contract. See Goodrich & Pennington, 2008 WL 698464 at *4. The court,
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in examining whether a promise could be implied, looked to the parties’ course of
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conduct surrounding the loan. See id. at *7. The Goodrich & Pennington court noted the
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defendant affirmatively acted “pursuant to its obligations” under a previous agreement.
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See id. Additionally, the defendant in Goodrich & Pennington “received a benefit” by
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accepting plaintiff’s payments during the parties’ disputed business dealings. See id.
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From this conduct, the court noted that the plaintiff “reasonably believed” the defendant
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would continue performing based on the parties’ agreement. See id. Therefore, based on
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the parties’ conduct, the court held that the plaintiff sufficiently pled an implied-in-fact
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contract. See id.
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Here, although Plaintiff acknowledges that the parties failed to expressly extend
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the Warrant’s expiration in the Exchange Agreement, Plaintiff sufficiently alleges that the
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parties’ conduct demonstrates the parties’ actual understanding to extend the Warrant.
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See FAC, ¶ 12, n. 1, ¶ 17. Specifically, on March 21, 2014, after the Exchange
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Agreement and New Note were signed, Defendant issued 100,000 shares of Common
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Stock to Plaintiff in response to Plaintiff’s “Warrant Notice of Exercise.” See FAC ¶ 17.
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Similar to Goodrich & Pennington, Defendant performed pursuant to its prior obligations
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“of the Warrant” and accepted Plaintiff’s payments. See FAC ¶ 17, see also FAC, Exh.
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F. Therefore, based on conduct, the FAC sufficiently alleges Plaintiff “reasonably
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believed” Defendant would continue performing pursuant the parties’ previous Warrant
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agreement. See Goodrich & Pennington Mort. Fund, Inc., 2008 WL 698464, at *7.
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The Court is unpersuaded that, as Defendant argues in its reply brief, this
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transaction was a “one-off” transaction independent of the allegedly expired and invalid
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Warrant. See Doc. No. 10, p. 4. As an initial matter, the Court does not accept factual
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assertions outside of the FAC as true for the purposes of ruling on Defendant’s 12(b)(6)
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motion. Further, the March 21, 2014 Notice of Exercise, which Defendant performed,
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specifically stated that Plaintiff’s request for Defendant to issue Common Stock was
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“pursuant to the terms of the Warrant.” See FAC, Exh. F. Additional language such as
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“Warrant Notice,” “Warrant Exercise,” and that “[t]he undersigned makes the
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representations and covenants set forth in Article 5 of the Warrant to Purchase Common
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Stock (Conversion Warrants)” in the Notice of Exercise all demonstrate the parties’ intent
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to extend the Warrant. See FAC, Exh. F. Thus, the Court finds Plaintiff sufficiently
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pleads an implied agreement to extend the Warrant, the terms of which are included in
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the Warrant agreement attached as part of the FAC and detail Plaintiff’s contractual right
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to purchase shares. Therefore, regarding Plaintiff’s first theory of breach, Plaintiff
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sufficiently pleads the legal effect, nature, and character of an implied contract, and that
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Defendant breached that implied contract. See, e.g., Zenith Ins. Co. v. Cozen O’Conner,
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148 Cal. App. 4th 998, 1011 (2007).
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iii.
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Also, Defendant contends that the alleged implied contract is barred by the statute
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The Statute of Frauds does not bar Plaintiff’s action.
of frauds and is therefore invalid. See Doc. No. 6-1, p. 6.
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California’s statute of frauds “declares several types of agreements ‘invalid’ unless
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‘they, or some note or memorandum thereof, are in writing and subscribed by the party to
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be charged or by the party’s agent.’” Westside Estate Agency, Inc. v. Randall, 211 Cal.
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Rptr. 3d 119, 124-25 (Ct. App. 2016) (quoting Cal. Civ. Code § 1624(a)); see also
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Texaco, Inc. v. Ponsoldt, 939 F.2d 794, 799 (9th Cir. 1991). For example, an oral
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agreement “that by its terms is not to be performed within a year from the making thereof
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is invalid.” Cal. Civ. Code § 1624(a)(1). The statute of frauds’ primary evidentiary
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purpose is “to require reliable evidence of the existence and terms of the contract and to
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prevent enforcement through fraud or perjury of contracts never in fact made.” In re
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Estate of Duke, 61 Cal. 4th 871, 889 (2015). “It is a well established rule in California
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that if, by its terms, performance of a contract is possible within one year, the contract
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does not fall within the statute [of frauds] even though it is probable that it will extend
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beyond one year.” Hopper v. Lennen & Mitchell, 145 F.2d 364, 366 (9th Cir. 1944)
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(emphasis added). “The statute of frauds may be satisfied where . . . the contract
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provides that a buyer will select and acquire certain [property rights] after the original
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written contract is executed.” Alameda Belt Line v. City of Alameda, 133 Cal. App. 4th
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15, 22 (2003).
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Defendant’s argument fails because Plaintiff’s performance under the Warrant was
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possible within one year. See FAC, Exh. B, §1.1. As Plaintiff argues, “Plaintiff could
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have exercised the monthly maximum amount of 15% over the course of eight months
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and purchased all 3,000,000 shares it had a right to purchase well before one year.” See
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Doc. No. 8, p. 6. Because “performance of a contract is possible within one year,” the
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statute of frauds does not invalidate the alleged implied contract.1 See Hopper, 146 F.2d
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at 366.
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D.
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Plaintiff’s Theory of Breach Based on the New Note
Lastly, it appears Plaintiff contends as a separate or alternative theory of liability
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that Defendant breached the New Note when Defendant “failed to deliver the shares
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[requested in the April 20, 2016 Conversion Notice]” to Plaintiff. See FAC ¶ 20.
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Specifically, the FAC alleges Defendant breached both sections 3.1 and 3.2 of the New
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Note when Defendant did not convert stock pursuant to Plaintiff’s Conversion Notice or
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issue payment requested in the demand letter. See FAC, Exh. H.
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Defendant alleges the “New Note cannot be an enforceable agreement without a
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valid Warrant to rely upon.” See id. at p. 8. However, as discussed above, the Court
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finds Plaintiff’s FAC sufficiently alleges the Warrant’s expiration was impliedly
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extended through conduct. Thus, even assuming that the validity of the New Note is
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dependent on the validity of the Warrant agreement, Defendant’s argument fails.
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Also, Defendant argues that it owed no duty to convert the shares requested in the
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Conversion Notice. See Doc. No. 6-1, p. 9. Specifically, Defendant contends “the New
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Note clearly states that Plaintiff cannot issue a conversion notice to Defendant if the
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amount of shares contained in the conversion notice would put Plaintiff’s ownership
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interest in Defendant’s outstanding stock over 9.99%.” See Doc. No. 6-1, p. 9.
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Defendant does not argue that conversion of the requested shares would have resulted in
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Plaintiff obtaining an ownership interest exceeding 9.99%, but rather, Defendant argues
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that Plaintiff must plead that conversion of the requested shares would not have had such
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a result. The Court is unconvinced that dismissal is warranted on that basis. Defendant’s
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argument is less an argument that it did not have a duty to perform under the contract as
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much as it is an argument that Plaintiff must plead facts precluding the existence of any
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For that reason, the Court need not address the issues of partial performance and estoppel that Plaintiff
raises.
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potential defenses that Defendant might raise. However, “plaintiffs need not anticipate
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and attempt to plead around all potential defenses.” See Xechem, Inc. v. Bristol-Myers
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Squibb Co., 372 F.3d 899, 901 (7th Cir. 2004). Unless a plaintiff “pleads itself out of
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court” in the complaint, “[c]omplaints need not contain any information about defenses
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and may not be dismissed for that omission.” Id.
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Accordingly, the Court is unpersuaded that Defendant’s arguments justify
dismissal of the FAC.
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IV. Conclusion
The Court, having considered all of Defendant’s arguments, and for the reasons
stated above, DENIES Defendant’s motion to dismiss. See Doc. No. 6.
IT IS SO ORDERED.
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Dated: April 7, 2017
_____________________________
Hon. Michael M. Anello
United States District Judge
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