Dropp et al v. Diamond Resorts International, Inc. et al
Filing
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ORDER denying #27 Motion; ORDER denying #31 Motion for Appointment of Counsel ; ORDER denying #32 Motion to Consolidate Cases; ORDER granting #35 Motion to Sever; ORDER granting #36 Motion to Change Venue; ORDER granting #37 Motion to Dismiss; ORDER denying #38 Motion to Strike; ORDER granting #39 Motion to Sever; ORDER granting #40 Motion to Change Venue; ORDER granting #41 Motion to Compel; ORDER granting #42 Motion to Dismiss; ORDER denying #43 Motion to Strike. The clerk of court is instructed to transfer the complaint as to plaintiff Kaarina Pakka only to the United States District Court for the District of Hawaii. Signed by Judge Andrew P. Gordon on 1/25/2019. (Copies have been distributed pursuant to the NEF - JM)
1
UNITED STATES DISTRICT COURT
2
DISTRICT OF NEVADA
3 JOSEPH M. DROPP, et al.,
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Case No.: 2:18-cv-00247-APG-GWF
Plaintiffs
5 v.
Order
[ECF Nos. 27, 31, 32, 35-43]
6 DIAMOND RESORTS INTERNATIONAL,
INC., et al.,
7
Defendants
8
9
Plaintiffs Joseph Dropp, Mary Dropp, Robert Levine, Susan Levine, and Kaarina Pakka
10 sue various parties related to the offer and sale of “points” that can be used to reserve rooms at
11 Diamond resorts and hotels. The plaintiffs spent thousands of dollars buying the points. They
12 filed this proposed class action asserting the defendants falsely represented that the points would
13 increase in value and could be sold for a profit. The plaintiffs contend that constitutes the offer
14 and sale of unregistered securities in violation of the Securities Act of 1933. They also assert
15 control person liability against defendants Michael Flaskey, Kenneth Siegel, Apollo
16 Management VIII, L.P., and Apollo Management, LLC.
17
The plaintiffs move for appointment of certain individuals as lead plaintiffs, approval of
18 class counsel, and consolidation of later-filed actions. ECF Nos. 27, 31, 32. The defendants
19 move to compel arbitration and dismiss the Dropp and Levine plaintiffs based on arbitration
20 provisions in the purchase agreements. ECF Nos. 37, 41, 42. The defendants also request that I
21 strike the complaint’s class allegations because the Dropp and Levine plaintiffs must individually
22 arbitrate their claims. ECF No. 38, 43. Finally, the defendants move to sever and transfer
23 Pakka’s claims because her purchase agreement contains a forum selection clause that requires
1 any dispute be brought in Hawai’i. ECF Nos. 35, 36, 39, 40. The plaintiffs oppose arbitration,
2 striking the class allegations, and severance and transfer of Pakka’s claims. However, Pakka
3 agrees to transfer her claims if the other plaintiffs are dismissed.
4
The parties are familiar with the facts, and I will not repeat them here except where
5 necessary. I grant the motions to compel arbitration. The arbitration provisions require
6 individual arbitration of the Dropp and Levine plaintiffs’ claims. Those provisions are
7 enforceable, and the question of whether the purchase agreements are void is a matter for the
8 arbitrator to decide. I therefore dismiss all of the Dropp and Levine plaintiffs’ claims. I transfer
9 Pakka’s claims to the District of Hawai’i, in conformity with the forum selection clause in her
10 purchase agreement and her consent to transfer if I dismiss the Dropp and Levine plaintiffs.
11 Finally, because I am dismissing the Dropp and Levine plaintiffs and transferring Pakka’s
12 claims, I deny as moot the plaintiffs’ motions to appoint lead plaintiffs, to approve class counsel,
13 and to consolidate later-filed actions.
14 I. ANALYSIS
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A. Motions to Compel Arbitration and to Dismiss
16
The Dropps entered into two purchase and security agreements with defendant Diamond
17 Resorts U.S. Collection Development, LLC (Diamond Collection) that contain arbitration
18 provisions. ECF Nos. 37-2; 37-3. The Levine plaintiffs also entered into two purchase and
19 security agreements with Diamond Collection, one that contains an identical arbitration provision
20 (ECF No. 37-4) and one that contains a similar arbitration provision (ECF No. 37-5).
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The arbitration provision in three of the four agreements provides that “any Claim
2 between Purchaser and [a] Company Party[1] shall be resolved by binding individual (and not
3 class) arbitration.” See, e.g., ECF No. 37-2 at 18. The provision also contains a clause
4 precluding participation in a “class action in court or in class-wide arbitration . . . with respect to
5 any claim.” Id. A claim is defined as “any legal claim, dispute or controversy between any
6 Company Party and Purchaser, including statutory, contract and tort disputes of all kinds and
7 disputes involving requests for declaratory relief, injunctions or other equitable relief.” Id.
8 However, a claim does not include “any dispute concerning the validity and effect” of the
9 agreement’s class action ban. Id. The class action ban itself makes clear that “any dispute about
10 the validity or effect of the . . . Class Action Ban shall be resolved by a court and not an
11 arbitrator . . . .” Id.2
12
A party seeking to compel arbitration under the Federal Arbitration Act (FAA) bears the
13 burden of showing “(1) the existence of a valid, written agreement to arbitrate; and, if it exists,
14 (2) that the agreement to arbitrate encompasses the dispute at issue.” Ashbey v. Archstone Prop.
15 Mgmt., Inc., 785 F.3d 1320, 1323 (9th Cir. 2015). The FAA provides that arbitration agreements
16 “shall be valid, irrevocable, and enforceable, save upon such grounds as exist in law or equity for
17 the revocation of any contract.” 9 U.S.C. § 2. Thus, a “party seeking to avoid enforcement of an
18 arbitration agreement can only invoke a defense that would be available to a party seeking to
19
20
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Company Party means Diamond Collection and all of its affiliated companies, officers, and
21 directors. ECF No. 37-2 at 18.
2
The Levine’s 2018 agreement is more specific about what questions are for the court versus the
arbitrator. That agreement states that a “claim” does not include “disputes about the validity,
enforceability, coverage or scope of this [arbitration] Provision or any part thereof, which are for
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a court to decide, provided that disputes about the validity or enforceability of this Agreement as
a whole are for the arbitrator to decide . . . .” ECF No. 37-5 at 5.
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1 avoid the enforcement of any contract,” and cannot rely on “a defense that is only applicable to
2 arbitration agreements.” Brown v. Dillard’s, Inc., 430 F.3d 1004, 1010 (9th Cir. 2005).
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The plaintiffs do not dispute that they signed the purchase agreements or that their claims
4 in this case generally fall within the parameters of the arbitration provisions. Instead, they offer
5 several reasons why those provisions are unenforceable.
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1. Whether the Entire Agreement is Void
The plaintiffs argue the purchase agreements as a whole are void because under federal
8 law, contracts for the sale of unregistered securities are void or voidable. They thus contend the
9 arbitration provision, as part of a void contract, is also void and unenforceable.
10
Whether the contract as a whole is void is a question for the arbitrator. Rent-A-Ctr., W.,
11 Inc. v. Jackson, 561 U.S. 63, 70 (2010); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.
12 440, 445-46 (2006) (stating that “unless the challenge is to the arbitration clause itself, the issue
13 of the contract’s validity is considered by the arbitrator in the first instance”). I may “properly
14 exercise jurisdiction over claims raising (1) defenses existing at law or in equity for the
15 revocation of (2) the arbitration clause itself.” Cox v. Ocean View Hotel Corp., 533 F.3d 1114,
16 1120 (9th Cir. 2008); see also Rent-A-Ctr., W., Inc., 561 U.S. at 71 (stating “the basis of
17 challenge [must] be directed specifically to the agreement to arbitrate before the court will
18 intervene”). Because this argument is directed at the entire contract, and not just the arbitration
19 provisions, I do not consider it.
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2. Exercise of Statutory Rights
The plaintiffs argue that requiring them to arbitrate their securities claim would preclude
22 their ability to bring it at all. They contend that to prove the defendants sold unregistered
23 securities, they need to show that the defendants operated through a common scheme of
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1 misrepresentations. They also argue it conflicts with their statutory right to proceed as a class
2 under the Private Securities Litigation Reform Act of 1995 (PSLRA).
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I may consider both of these arguments because they challenge the enforceability of the
4 arbitration provision itself, rather than the purchase agreements generally. Additionally, these
5 arguments also challenge the class action ban in the purchase agreements, and those agreements
6 expressly reserve challenges to the class action ban to the court.
7
An arbitration provision may be invalidated on public policy grounds if it results in a
8 “prospective waiver of a party’s right to pursue statutory remedies.” Am. Exp. Co. v. Italian
9 Colors Rest., 570 U.S. 228, 235 (2013) (emphasis and quotation omitted). The plaintiffs do not
10 explain how requiring them to proceed in individual arbitration will preclude them from pursuing
11 a securities claim. Nothing prevents each plaintiff from laying out for the arbitrator the entire
12 alleged scheme to support the claim in each case that the defendants sold unregistered securities.
13 It precludes them only from jointly arbitrating the cases. This argument therefore does not
14 support invalidating the arbitration provision or the class action ban. See id. at 236 (holding that
15 a class-action waiver did not render an arbitration clause invalid because individual arbitration
16 adequately ensured “effective vindication” of a federal right).
17
The plaintiffs alternatively contend that the PSLRA provides a right to bring a securities
18 class action that an arbitration clause cannot take away. As a general matter, “arbitration
19 agreements are equally applicable to statutory claims as to other types of common law claims.”
20 Lozano v. AT & T Wireless Servs., Inc., 504 F.3d 718, 725 (9th Cir. 2007). However, the FAA
21 “may be overridden by a contrary congressional command.” Shearson/Am. Exp., Inc. v.
22 McMahon, 482 U.S. 220, 226 (1987). The party opposing arbitration bears the burden of
23 showing that “Congress intended to preclude a waiver of judicial remedies for the statutory rights
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1 at issue.” Id. at 227. That intent “will be deducible from [the statute’s] text or legislative history,
2 . . . or from an inherent conflict between arbitration and the statute’s underlying purposes.” Id.
3 (internal citation and quotation omitted).
4
The Supreme Court has “rejected efforts to conjure conflicts between the Arbitration Act
5 and other federal statutes.” Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1627 (2018). “[E]ven a
6 statute’s express provision for collective legal actions does not necessarily mean that it precludes
7 individual attempts at conciliation through arbitration.” Id. (quotation omitted). The “absence of
8 any specific statutory discussion of arbitration or class actions is an important and telling clue
9 that Congress has not displaced the Arbitration Act.” Id.
10
The PSLRA provides extensive procedures for class actions under the Securities Act
11 beyond those required for class actions under Federal Rule of Civil Procedure 23. See 15 U.S.C.
12 § 77z-1. Although the PSLRA codifies those procedures, it does not specifically preclude
13 individualized arbitration of Securities Act claims. Rather, it places more demanding
14 requirements on the parties and the court in securities class action cases. The Act was aimed at
15 curbing abuses in securities class actions. H.R. Rep. 104-369. The statutory language and
16 legislative history do not reflect a congressional intent to enshrine a non-waivable federal right to
17 proceed as a class in a judicial forum in securities cases.
18
Additionally, there is no inherent conflict between the FAA and the Securities Act’s
19 underlying purposes. “A party seeking to suggest that two statutes cannot be harmonized, and
20 that one displaces the other, bears the heavy burden of showing a clearly expressed congressional
21 intention that such a result should follow.” Epic Sys. Corp., 138 S. Ct. at 1624 (quotation
22 omitted). That intention “must be clear and manifest.” Id. (quotation omitted). There is a strong
23 presumption against repeal by implication. Id.
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1
Arbitration of Securities Act claims is generally permissible. See Rodriguez de Quijas v.
2 Shearson/Am. Exp., Inc., 490 U.S. 477, 484-86 (1989). Nothing about the class action
3 procedures of the PSLRA suggests an aggrieved person could not fulfill the Securities Act’s
4 enforcement purposes through individualized arbitration, just as he or she could through an
5 individualized lawsuit. Had Congress intended to preclude individualized arbitration in
6 securities cases, it could have said so. See Epic Sys. Corp., 138 S. Ct. at 1626 (noting that “when
7 Congress wants to mandate particular dispute resolution procedures it knows exactly how to do
8 so,” and that “Congress has likewise shown that it knows how to override the Arbitration Act
9 when it wishes”).
10
The plaintiffs have not met their burden of showing that Congress intended to preclude
11 individualized arbitration for Securities Act claims. I therefore reject the plaintiffs’ argument
12 that the arbitration provisions and the class action bans are unenforceable as irreconcilable with
13 the Securities Act.
14
15
3. Arbitration Clauses in Registration Statements
The plaintiffs argue that the Securities and Exchange Commission (SEC) does not allow
16 arbitration clauses in registration statements, so it would not allow an arbitration clause in the
17 analogous situation of an offering of securities. They thus contend that if the defendants had
18 properly registered the securities, the SEC would not have allowed them to insert an arbitration
19 provision in the purchase agreements, so the provision should be unenforceable where the
20 defendants dodged their duty to register.
21
This challenge is directed solely at the arbitration provision, rather than the purchase
22 agreements as a whole, so I may consider it. However, § 2 of the FAA permits arbitration
23 agreements to be invalidated only “by generally applicable contract defenses, such as fraud,
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1 duress, or unconscionability, but not by defenses that apply only to arbitration or that derive their
2 meaning from the fact that an agreement to arbitrate is at issue.” AT&T Mobility LLC v.
3 Concepcion, 563 U.S. 333, 339 (2011). This defense is directed at the fact that an agreement to
4 arbitrate is at issue. It is not a generally applicable contract defense. This argument therefore
5 does not support a ruling that the arbitration provisions are unenforceable under the FAA.
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4. Procedural and Substantive Unconscionability
The plaintiffs argue the arbitration provisions are unenforceable because they are
8 procedurally and substantively unconscionable. As to procedural unconscionability, the
9 plaintiffs contend the provisions are part of adhesion contracts that were presented to the
10 plaintiffs on a take-it-or-leave-it basis without time for them to consider outside the defendants’
11 high pressure sales pitch or to obtain independent legal advice. The plaintiffs argue the
12 provisions are substantively unconscionable because they require the plaintiffs to give up their
13 statutory rights.
14
Because this challenge is to the enforceability of the arbitration provisions rather than the
15 purchase agreements as a whole, it is a question for the court, not the arbitrator.
16 Unconscionability is a generally applicable contract defense that “may be applied to invalidate
17 arbitration agreements without contravening § 2” of the FAA. Kilgore v. KeyBank, Nat. Ass’n,
18 718 F.3d 1052, 1058 (9th Cir. 2013) (en banc) (quotation omitted). The purchase agreements, by
19 their terms, are governed by Nevada law. ECF Nos. 37-2 at 7; 37-3 at 8; 37-4 at 7; 37-5 at 6.
20 “Nevada law requires both procedural and substantive unconscionability to invalidate a contract
21 as unconscionable.” U.S. Home Corp. v. Michael Ballesteros Tr., 415 P.3d 32, 40 (2018) (en
22 banc).
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1
The plaintiffs’ only argument for why the arbitration provisions are substantively
2 unconscionable is that they require the plaintiffs to forego their claims under the Securities Act.
3 But as discussed above, that is incorrect. The plaintiffs will be able to arbitrate their Securities
4 Act claims, but individually and not as a class. The provisions therefore are not substantively
5 unconscionable. Because a finding of unconscionability requires both substantive and
6 procedural unconscionability, the arbitration provisions are not unenforceable as unconscionable.
7
But even if I considered the issue, the arbitration provisions also are not procedurally
8 unconscionable. Even accepting as true that the defendants engaged in a high pressure sales
9 pitch, the purchasers could opt out of the arbitration provisions within 30 days without impacting
10 any other rights under the agreements. See, e.g., ECF Nos. 37-2 at 18 (“Opting out of arbitration
11 will not affect any other provision of this agreement.”); 37-5 at 6 (“Rejection of arbitration will
12 not affect any other term of this Agreement.”). Consequently, the arbitration provisions were not
13 take-it-or-leave-it provisions. Additionally, the arbitration provisions contained other procedural
14 protections, including that Diamond Collection agreed to pay all of the arbitrator’s fees and the
15 purchaser’s reasonable attorney’s fees and expenses if the purchaser prevails; that the arbitration
16 may take place at a location reasonably convenient for the purchasers; and that the arbitrator may
17 award any remedy that would be available in an individual court proceeding.
18
The arbitration provisions are neither substantively nor procedurally unconscionable.
19 This argument therefore does not support a ruling that the arbitration provisions are
20 unenforceable under the FAA.
21
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5. Apollo Defendants
The plaintiffs argue that even if the arbitration provisions are enforceable, they cannot be
23 forced to arbitrate with defendants Apollo Management VIII, L.P. or Apollo Global
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1 Management, LLC because these entities are not signatories to the purchase agreements. The
2 defendants assert that the Apollo defendants are affiliates of Diamond Collection and so fall
3 within the provisions’ parameters. Alternatively, they argue that because all of the claims are
4 intertwined, the entire matter should be sent to arbitration under an estoppel theory.
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“[N]onsignatories of arbitration agreements may be bound by the agreement under
6 ordinary contract and agency principles[,] including equitable estoppel.” Dylag v. W. Las Vegas
7 Surgery Ctr., LLC, 719 F. App’x 568, 570 (9th Cir. 2017) (quotation omitted). I apply state law
8 to determine whether equitable estoppel applies. Arthur Andersen LLP v. Carlisle, 556 U.S. 624,
9 630-31 (2009).
10
The parties’ agreements designate Nevada law as controlling. Nevada recognizes the
11 doctrine of equitable estoppel in the context of determining when a nonsignatory to an arbitration
12 agreement may compel or be compelled to arbitrate. Truck Ins. Exch. v. Palmer J. Swanson, Inc.,
13 189 P.3d 656, 660-61 (Nev. 2008). Equitable estoppel may apply in two circumstances. “First,
14 equitable estoppel applies when the signatory to a written agreement containing an arbitration
15 clause must rely on the terms of the written agreement in asserting its claims against the
16 nonsignatory.” Hard Rock Hotel, Inc. v. Eighth Jud. Dist. Ct. of State in & for Cty. of Clark, 390
17 P.3d 166, 2017 WL 881877, at *2 (Nev. 2017) (unpublished).3 Under this first theory, when
18 “each of a signatory’s claims against a nonsignatory makes reference to or presumes the
19 existence of the written agreement, the signatory’s claims arise out of and relate directly to the
20 written agreement, and arbitration is appropriate.” Id. (quotation and internal quotation marks
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Hard Rock Hotel, Inc. involved a jury trial waiver, not an arbitration provision. However, that
court referred to the Fourth Circuit’s framework for analyzing arbitration provisions and stated
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“there does not appear to be a different framework that is used in the context of jury trial
waivers.” Hard Rock Hotel, Inc., 390 P.3d 166, 2017 WL 881877, at *1 n.4.
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1 omitted). “Second, application of equitable estoppel is warranted when the signatory to the
2 contract containing the arbitration clause raises allegations of substantially interdependent and
3 concerted misconduct by both the nonsignatory and one or more of the signatories to the
4 contract.” Id. (quotation omitted).
5
Equitable estoppel applies in this case under both theories. Under the first theory, the
6 plaintiffs’ Securities Act claim refers to and presumes the existence of the purchase agreements
7 because it is through those agreements that the defendants allegedly sold unregistered securities.
8 Under the second theory, the plaintiffs allege the Apollo defendants are liable as control persons
9 for the Diamond defendants’ actions. ECF No. 1 at 36-37. Specifically, the complaint alleges
10 that the Apollo defendants had the power to influence the Diamond defendants and exercised that
11 power “to cause” the Diamond defendants “to engage in the unlawful acts and conduct
12 complained of herein.” Id. at 37. The plaintiffs therefore have alleged substantially
13 interdependent and concerted misconduct by the signatory, Diamond Collection, and the
14 nonsignatories, the Apollo defendants as control persons.4 I therefore enforce the arbitration
15 provisions as to the Apollo defendants.
16
6. Dismiss or Stay
17
The defendants move to dismiss the Dropp and Levine plaintiffs’ claims once I compel
18 arbitration. The plaintiffs request that I stay the matter because it is possible that the arbitrator
19 will rule the agreements are void.
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4
A divided panel of the Ninth Circuit predicted in an unpublished disposition that “Nevada
would require that the allegations of substantially interdependent and concerted misconduct be
founded in or intimately connected with the obligations of the underlying agreement.” Dylag,
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719 F. App’x at 571 (quotation omitted). Assuming without deciding that this is the standard
under Nevada law, the plaintiffs’ Securities Act claims are founded in or intimately connected
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with the obligations of the purchase agreements. The plaintiffs seek to rescind the agreements,
thus obviating the parties’ mutual obligations under them. ECF No. 1 at 37-38.
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1
I may stay this case pending resolution of the arbitration proceedings. 9 U.S.C. § 3.
2 Alternatively, where an arbitration provision bars all of a plaintiff’s claims, I may dismiss them.
3 Sparling v. Hoffman Const. Co., 864 F.2d 635, 638 (9th Cir. 1988).
4
The arbitration provisions bar the Dropp and Levine plaintiffs’ claims. I therefore
5 dismiss them without prejudice to those plaintiffs pursuing them in arbitration.
6
B. Sever and Transfer Pakka
7
The defendants argue that Pakka’s claims should be severed and transferred to Hawai’i
8 based on the forum selection clause in her agreement. Pakka consents to the severance and
9 transfer of her case to Hawai’i if I dismiss the Dropp and Levine plaintiffs’ claims. ECF No. 62
10 at 30. Because I have dismissed the Dropp and Levine plaintiffs’ claims, I transfer Pakka’s
11 claims to the District of Hawai’i.
12
C. Motions to Strike
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The defendants argue that once I compel arbitration, I should strike the class allegations
14 in the complaint because the Dropp and Levine plaintiffs must arbitrate individually. Because I
15 have dismissed the Dropp and Levine plaintiffs’ claims and transferred Pakka’s claims, the
16 motions to strike the class action allegations are moot.
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D. The Plaintiffs’ Motions
18
Because I am dismissing the Dropp and Levine plaintiffs’ claims, and transferring
19 Pakka’s claims, I deny as moot the plaintiffs’ motions to appoint lead plaintiffs, to approve class
20 counsel, and to consolidate later-filed actions.
21 / / / /
22 / / / /
23 / / / /
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1 II. CONCLUSION
2
IT IS THEREFORE ORDERED that the plaintiffs’ motions for appointment of lead
3 plaintiffs (ECF No. 27), for approval of class counsel (ECF No. 31), and for consolidation of
4 later-filed actions (ECF No. 32) are DENIED as moot.
5
IT IS FURTHER ORDERED that the defendants’ motions to compel arbitration and to
6 dismiss (ECF Nos. 37, 41, 42) are GRANTED. Plaintiffs Joseph Dropp, Mary Dropp, Robert
7 Levine and Susan Levine must individually arbitrate their claims against all defendants in this
8 action. I therefore dismiss their claims, without prejudice to pursue them in arbitration.
9
IT IS FURTHER ORDERED that the defendants’ motions to strike (ECF Nos. 38, 43)
10 are DENIED as moot.
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IT IS FURTHER ORDERED that the defendants’ motions to sever and transfer plaintiff
12 Kaarina Pakka’s claims (ECF Nos. 35, 36, 39, 40) are GRANTED. The clerk of court is
13 instructed to transfer the complaint as to plaintiff Kaarina Pakka only to the United States
14 District Court for the District of Hawai’i.
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DATED this 25th day of January, 2019.
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ANDREW P. GORDON
UNITED STATES DISTRICT JUDGE
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