Opinion
2:24-cv-01850-JAM-JDP
11-06-2024
PRO 49 DEVELOPMENT, LLC, a California limited liability company, Plaintiff, v. NESS EXPRESS 1, LLC, a Delaware limited liability company; ADAM DECKER, an individual; JOSEPH DECKER, an individual, et al., Defendants.
ORDER DENYING DEFENDANTS' MOTION TO DISMISS
JOHN A. MENDEZ, SENIOR UNITED STATES DISTRICT JUDGE
Before the Court is Defendants Adam Decker and Joseph Decker's (collectively, the “Deckers”) motion to dismiss. See Mot., ECF No. 22. Pro 49 Development (“Plaintiff”) opposes. See Opp'n, ECF No. 24. The Deckers reply. See Reply, ECF No. 26. For the following reasons, Defendants' motion is DENIED.
This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled for November 19, 2024.
I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
Plaintiff originally filed suit in the Superior Court of California, County of Placer. See Notice of Removal, ECF No. 1. Defendants then properly removed the case to federal court under diversity jurisdiction. See id.; see also Order Denying Motion to Remand, ECF No. 25.
This controversy arises out of a lease between Plaintiff and Defendant Ness Express 1 (“Ness”) for the establishment of a car wash under the franchise of Defendant Tommy's Express. See Comp. ¶ 1, ECF No. 1. Plaintiff alleges that Ness violated the lease and that named defendants (the Deckers and Ryan Essenburg) interfered with the lease. See id. Plaintiff brings thirteen causes of action, including breach of contract. See id. at 1.
The Deckers now move to dismiss nine causes of action for failure to state a claim upon which relief can be granted. Mot. at 1-2. Specifically, the Deckers argue that Plaintiff has failed to adequately allege that they are the alter ego of Ness. See id. at 4. Plaintiff responds that it has sufficiently pled this allegation. See Opp'n at 1.
II. OPINION
A. Legal Standard
A Rule 12(b)(6) motion challenges the sufficiency of a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “To survive a motion to dismiss [under 12(b)(6)], a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation omitted). Plausibility requires “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. While “detailed factual allegations” are unnecessary, the complaint must allege more than “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. Conclusory allegations are not to be considered in the plausibility analysis. Id. at 679 (“While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.”). When a plaintiff fails to “state a claim upon which relief can be granted,” the Court must dismiss the claim. Fed.R.Civ.P. 12(b)(6).
B. Request for Judicial Notice
Under Federal Rule of Evidence 201, a district court may take judicial notice of a fact that is “not subject to reasonable dispute because it can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b)(2). A court may therefore take judicial notice of matters of public record. Reyn's Pasta Bella LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir. 2006). It also is proper for a court to consider evidence subject to judicial notice while deciding a motion to dismiss. Weston Fam. P'ship LLLP v. Twitter, Inc., 29 F.4th 611, 617 (9th Cir. 2022).
The Deckers request that the Court take judicial notice of Ness's State of Delaware Certification of Formation of Limited Liability Company. See Request for Judicial Notice, ECF No. 222. The Certification shows that Ness was formed on June 6, 2023, and that Joseph Decker signed as the “Authorized Person.” See id. Because the Deckers seek judicial notice of a document that is a matter of public record and the request is unopposed, the Court GRANTS this request.
C. Alter Ego Liability
The Court must first determine the law that will apply to its alter ego analysis. “Where a statute dictates the choice-of-law, the court need not apply a common law choice-of-law analysis.” Wehlage v. EmpRes Healthcare Inc., 821 F.Supp.2d 1122, 1128 (N.D. Cal. 2011) (citing Barclays Discount Bank Ltd. v. Levy, 743 F.2d 722, 725 (9th Cir. 1984)). California Corporations Code Section 17708.01 states that “[t]he law of the state or other jurisdiction under which a foreign limited liability company is formed governs . . . the liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of the limited liability company.” Cal. Corp. Code § 17708.01. This statutory language “encompasses the determination of an LLC's alter ego liability.” MacRae v. HCR Manor Care Servs., LLC, No. SACV140715DOCRNB, 2017 WL 11480091, at *3 (C.D. Cal. Sept. 14, 2017). Accordingly, federal courts in California apply the law of the state of incorporation in assessing the alter ego of an LLC. See e.g., Greenlight Sys., LLC v. Breckenfelder, No. 19-CV-06658-EMC, 2021 WL 2651377, at *17 (N.D. Cal. June 28, 2021), aff'd, No. 2116245, 2022 WL 17222415 (9th Cir. Nov. 25, 2022) (applying Ohio law because it was the state of incorporation); Wehlage, 821 F.Supp.2d at 1128-29 (applying Washington law because it was the state of incorporation); MacRae, 2017 WL 11480091 at *3 (applying Delaware law for the alter ego analysis of a Delaware LLC, and applying Ohio law for the alter ego analysis of an Ohio LLC).
Because Ness is an LLC incorporated in Delaware, the Court applies Delaware law in its alter ego analysis. See Request for Judicial Notice. The Deckers agree with this conclusion, and Plaintiff does not address this question. See Mot. at 7; see generally Opp'n.
In NetJets, the Second Circuit applied Delaware law in determining whether a corporation was the alter ego of an individual. It held that the relevant standard is “whether the two entities operated as a single economic entity such that it would be inequitable for the Court to uphold a legal distinction between them.” NetJets Aviation, Inc. v. LHC Commc'ns, LLC, 537 F.3d 168, 177 (2d Cir. 2008) (cleaned up). The court thus articulated a “two-pronged test . . . (1) whether the entities in question operated as a single economic entity, and (2) whether there was an overall element of injustice or unfairness.” Id.; see also Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995).
1. Single Economic Entity
The NetJets court held that the “alter ego analysis must start with an examination of factors which reveal how the corporation operates and the particular defendant's relationship to that operation. These factors include whether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder.” NetJets, 537 F.3d at 176-177 (citation omitted). The court recognized that “somewhat less emphasis is placed on whether the LLC observed internal formalities because fewer such formalities are legally required” in Delaware. Id. at 178. The court continued that “no single factor can justify a decision to disregard the corporate entity” and, instead, “some combination of them is required.” Id. at 177 (internal quotation marks and citation omitted).
Here, Plaintiff argues that Ness was undercapitalized and insolvent, and that it simply functioned as a facade for the Deckers.
a. Undercapitalized and Insolvent
Plaintiff makes the following relevant allegations: Ness “was created without assets for the express and specific purpose of entering into the Lease,” Compl. ¶ 13(f); Ness could not demonstrate its solvency, so the Deckers “each submitted their own individual finances” to enter the Lease, id. ¶ 13(k); Ness ”on or about December 4, 2023, . . . admitted in writing that it cannot afford to perform the construction it needs to on the” leased property, id. ¶ 13(d); and Ness “on or about December 15, 2023, . . . admitted in writing that one of the reasons it was abandoning its obligations under the Lease was that” regulations were “prohibitively expensive,” id. ¶ 13(e).
Taken together, these allegations plausibly state that Ness was undercapitalized and insolvent.
b. Functioned as a Facade
To demonstrate that Ness functioned as a fapade for the Deckers, Plaintiff alleges: Ness was “a mere shell, instrumentality, and conduit[] through which” the Deckers exercised “complete control and dominance,” id. ¶ 13(a); the Deckers formed Ness for the “express and specific purpose of entering into the Lease,” id. ¶ 13(f); Ness was “controlled, dominated, and operated by” the Deckers, id. ¶ 13(i); the business affairs of the Deckers and Ness are “so mixed and intermingled that the same cannot be reasonably segregated,” id. ¶ 13(j); the Deckers and Ness were “commingling its assets with one another,” id. ¶ 14; neither Ness nor the Deckers made any payment under the lease, id. ¶ 69; and the Deckers formed “a financially insolvent entity” “to avoid any liability related to the injury Plaintiff suffered,” id. ¶¶ 13(b), 14. These allegations plausibly state that Ness functioned as a fapade for the Deckers, who exercised complete control over the entity.
Other evidence supports these allegations. The Deckers' Request for Judicial Notice indicates that they formed Ness for the sole purpose of entering into the agreement with Plaintiff. The public record shows that Ness was formed on June 6, 2023. See Request for Judicial Notice. Just a week later, on June 13, 2023, Adam Decker made an offer to Plaintiff for the leased property, and on September 19, 2023, Plaintiff entered into the contract with Ness. See Compl. ¶¶ 17, 23. To be sure, the Deckers admit in their brief that Ness “was formed for the sole purpose of building and operating a Tommy's Express Car Wash Franchise” on the leased property. See Reply at 2.
Also, the Deckers previously stated that Ness is “wholly owned by parent company” Ness Express Holdings. See Rule 7.1 Corporate Disclosure Statement, ECF No. 2. The Deckers also admit that they are the “sole members of Ness Holdings,” which means they exclusively and completely control Ness. See id.; see also Mot. at 5 (Deckers stating that they own Ness Holdings, and that Ness Holdings is the sole member of Ness).
Accordingly, Plaintiff has sufficiently alleged that Ness functioned as a facade for the Deckers, and the Deckers maintained complete and exclusive control over Ness. Taken together with Plaintiff's allegations regarding undercapitalization and insolvency, the Court finds that a combination of factors supports disregarding the corporate entity. See NetJets, 537 F.3d at 177.
2. Element of Injustice or Unfairness
“[T]he plaintiff need not prove that the corporation was created with fraud or unfairness in mind. It is sufficient to prove that it was so used.” NetJets, 537 F.3d at 177. The NetJets court held that “the claimed injustice must consist of more than merely the tort or breach of contract that is the basis of the plaintiff's lawsuit . . . [b]ut nothing prevents a court, in determining whether there is sufficient evidence of fraud or unfairness, from taking into account relevant evidence that is also pertinent to the question of whether the two entities in question functioned as one.” NetJets, 537 F.3d at 183. Indeed, courts applying Delaware law have found that, for a motion to dismiss, “[a]llegations of undercapitalization and siphoning of funds are sufficient to satisfy the ‘injustice or unfairness' element.” See Essar Steel Algoma Inc. v. Nevada Holdings, Inc., No. 17MISC360ATRWL, 2020 WL 2539031, at *4 (S.D.N.Y. May 18, 2020) (collecting cases).
As explained above, Plaintiff has sufficiently alleged that Ness was undercapitalized, insolvent, and a facade for the Deckers. Taken as true for the purposes of this motion, these allegations demonstrate that the Deckers abused the corporate form to promote injustice. In line with other courts applying Delaware law, the Court therefore finds that these allegations satisfy the injustice or unfairness element to survive a motion to dismiss. See e.g., McBeth v. Porges, 171 F.Supp.3d 216, 234 (S.D.N.Y. 2016) (“[T]he allegations regarding the commingling of personal and corporate assets and the insufficient capital to cover expenses plausibly plead an ‘inequitable use of the corporate form.'”); TradeWinds Airlines, Inc. v. Soros, No. 08 Civ. 5901, 2012 WL 983575 (S.D.N.Y. Mar. 22, 2012) (finding that the allegation that defendants improperly left a corporation undercapitalized was sufficient to show fundamental injustice); Blair v. Infineon Techs. AG, 720 F.Supp.2d 462, 473 (D. Del. 2010) (holding that misdirection of funds, dominating control, and siphoning of funds supported existence of injustice or unfairness). Accordingly, drawing all inferences in Plaintiff's favor, Plaintiff has satisfied both prongs of this analysis and plausibly stated that the Deckers are the alter ego of Ness.
The Deckers' final argument here is that Plaintiff's allegations of injustice or unfairness fail to satisfy Federal Rule of Civil Procedure 9(b). A plaintiff “must satisfy Rule 9(b)'s particularity standard as to the fraud element of plaintiff's alter ego theory.” Wimbledon Fund, SPC v. Graybox, LLC, No. CV15-6633-CAS(AJWX), 2016 WL 7444709, at *5 (C.D. Cal. Aug. 31, 2016) (collecting cases). This rule requires a plaintiff to plead allegations of fraud with particularity, including the “circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b).
The Deckers argue that Plaintiff failed to satisfy Rule 9(b) because it did not provide “further elaboration of what the injustice would be” if the Court found that the Deckers are not the alter ego of Ness. See Mot. at 12 (internal quotation marks and citation omitted). But Plaintiff has sufficiently pled that the injustice would be that the Deckers “would avoid any liability” in this action. See Compl. ¶ 14. Moreover, none of the cases the Deckers cite for this proposition applied Delaware law. See Mot. at 11-12. In the most relevant case cited, the court held that “the mere allegation that [the corporation] is undercapitalized is not enough to imply an unjust result.” Orosa v. Therakos, Inc., No. C-11-2143 EMC, 2011 WL 3667485, at *7 (N.D. Cal. Aug. 22, 2011) . But Orosa is inapposite because the court there found that the plaintiff failed to satisfy the first prong of the alter ego analysis, and thus the court did not consider whether a sufficient undercapitalization allegation satisfied the injustice element. See id. at *6 (“Plaintiff's allegations are insufficient to satisfy either prong of the alter ego theory”). Regardless, courts applying Delaware law are clear that Plaintiff's allegations are sufficient to satisfy the injustice or unfairness prong on a motion to dismiss.
As such, Plaintiff has adequately alleged here that the Deckers created a shell corporation they completely controlled for the sole purpose of entering the lease, violated the terms of that lease, and now are hiding behind an undercapitalized and insolvent corporation to avoid liability for injuries suffered by Plaintiff. These allegations satisfy the heightened pleading standard and show bad faith conduct on the part of the Deckers. Accordingly, Plaintiff has sufficiently pled that the Deckers are the alter ego of Ness.
3. Federal Rule of Civil Procedure 8(a)
The Deckers' only remaining argument in support of their motion to dismiss is that Plaintiff failed to satisfy Federal Rule of Civil Procedure 8(a)(2), which requires “a short and plain statement of the claim” to put defendants on sufficient notice of the allegations against them. Fed.R.Civ.P. 8(a)(2). The Deckers contend that Plaintiff fails to differentiate between them throughout its complaint. See Mot. at 10. But the complaint is clear that the Deckers are alleged to have engaged in the same conduct: forming Ness to enter the lease and then violating the agreement. Accordingly, Plaintiff has presented a plain statement of the claim such that each of the Deckers are on sufficient notice of the allegations against them.
III. ORDER
For the reasons set forth above, Defendants' motion to dismiss is DENIED. Adam Decker and Joseph Decker are hereby ordered to answer the complaint within fourteen (14) days of this Order.
IT IS SO ORDERED.