Case 2:11-cv-04175-SJO -PLA UNITED Document STATES 11 DISTRICT Filed 08/10/11 COURT Page 1 of Priority 5 Page ID #:103 Send Enter Closed JS-5/JS-6 Scan Only TITLE: James McFadden et. al. v. National Title Co. et. al. ====== 11111 PRESENT: THE HONORABLE S. JAMES OTERO, UNITED STATES DISTRICT JUDGE Victor Paul Cruz Courtroom Clerk COUNSEL PRESENT FOR PLAINTIFF: Court Reporter COUNSEL PRESENT FOR DEFENDANTS: ====== 11111 PROCEEDINGS (in chambers): ORDER GRANTING DEFENDANT'S MOTION TO DISMISS [Docket No. 4] This matter is before the Court on Defendants National Title Co., Clark County Inspection Services, and Tracy Bouchard's (collectively, "Defendants") Motion to Dismiss ("Motion"), filed on June 23, 2011. (Docket No. 4.) Plaintiffs James McFadden, Mike Golpa, and Mario Gonzales (collectively, "Plaintiffs") filed an Opposition, to which Defendants filed a Reply. 1 The Court found this matter suitable for disposition without oral argument and vacated the hearing set for July 25, 2011. See Fed. R. Civ. P. 78(b). For the reasons set forth below, the Motion is GRANTED. I. BACKGROUND This is a federal securities case concerning the damages from an allegedly fraudulent real estate investment operation. Plaintiffs are citizens of California and Nevada, who purchased investment properties in Las Vegas, Nevada in 2005. ( See Compl. 5, 6, 7.) Defendant National Title Co. ("National Title") is a business entity incorporated in Nevada. ( Id. 8.) It provided escrow and title services to Plaintiffs on all investment properties purchased by Plaintiffs. ( Id.) Defendant Clark County Inspection Services ("CCIS") is a business entity incorporated in Nevada. Plaintiffs allege that CCIS fraudulently charged fees for inspection services during the purchase process that were never performed. ( Id. 9.) Defendant Tracy Bouchard ("Bouchard") is an individual living in Las Vegas. Plaintiffs allege that Bouchard is the sole owner, officer and director of both National Title and CCIS. ( Id. 10.) Plaintiffs made payments on the properties for about two years. (Mot. at 3:8-9.) Defendants allege that in 2007, the properties were foreclosed as a result 1 Defendants filed a Reply that exceeds five pages. The Court's Initial Standing Order mandates that "[n]o reply may exceed five pages." (Standing Order 19.) Because Defendants failed to comply with the Initial Standing Order, the Court declines to read Defendants' Reply after the fifth page. MINUTES FORM 11 CIVIL GEN Page 1 of 5 Initials of Preparer
Case 2:11-cv-04175-SJO -PLA Document 11 Filed 08/10/11 Page 2 of 5 Page ID #:104 of the economic downturn and Plaintiffs' inability to make payments. ( Id. at 3:9-11.) On May 16, 2011, Plaintiffs filed a Complaint, asserting two claims: (1) violation of section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act of 1934") and the Securities Exchange Commission ("SEC") Rule 10b-5 ; and violation of section 20(a) of the Exchange Act of 1934. (See generally Compl.) II. DISCUSSION A. Legal Standard for Motion to Dismiss A motion to dismiss pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6) tests the legal sufficiency of the claims asserted. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-200 (9th Cir. 2003). In considering a motion to dismiss, a court must accept as true the allegations of the complaint in question. Hosp. Bldg. Co. v. Rex Hosp. Trs., 425 U.S. 738, 740 (1976). The Court is required to construe the pleading in the light most favorable to the party opposing the motion and resolve all doubts in the pleader's favor. See Jenkins v. McKeithen, 395 U.S. 411, 421 (1969). Dismissal is appropriate only if "it appears beyond a doubt that the plaintiff[s] can prove no set of facts in support of [a] claim." Abramson v. Brownstein, 897 F.2d 389, 391 (9th Cir. 1990). On a motion to dismiss pursuant to Rule 12(b)(6), the Court must limit its review to the four corners of the operative complaint and may not consider facts presented in briefs or extrinsic evidence. See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). A court, however, is "not bound to accept as true a legal conclusion couched as a factual allegation." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). A complaint must contain "more than labels and conclusions" or "a formulaic recitation of the elements of a [claim]." Id. at 554; see also In re VeriFone Sec. Litig., 11 F.3d 865, 868 (9th Cir. 1993) ("Conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim."). Thus, dismissal is proper if the claim lacks a "cognizable legal theory" or "sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). To plead sufficient facts, a party must proffer "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 547. A claim is facially plausible when "the plaintiff[s] [plead] factual content that allows the court to draw the reasonable inference that the defendant[s] [are] liable for the misconduct alleged." Ashcroft v. Iqbal, U.S., 129 S. Ct. 1937, 1949 (2009). B. Statute of Limitations Defendants assert that the applicable statute of limitations bars Plaintiff's federal claims. Defendants contend that "the purchase and sale transaction alleged to be 'securities violations' indisputably took place in 2005[,] when the properties were purchased by Plaintiffs and escrow was closed." (Mot. 15:21-16:9.) Plaintiffs do not dispute the alleged date of the violation, nor do they attempt to address in their Opposition whether the statute of limitations bars their securities fraud claims. ( See generally Opp'n.) Page 2 of 5
Case 2:11-cv-04175-SJO -PLA Document 11 Filed 08/10/11 Page 3 of 5 Page ID #:105 The statute of limitations defense "may be raised by a motion for dismissal or by summary judgment motion." Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1990). "Under the Sarbanes-Oxley Act of 2002, the statute of limitations for a claim [of fraud, deceit, manipulation, or contrivance] brought under [the Securities Exchange Act of 1934] is two years from the discovery of facts constituting the violation[,] but no more than five years from the date of the violation." In re Juniper Networks, Inc. Sec. Litig., 542 F. Supp. 2d 1037, 1050 (N.D. Cal. 2008) (citing 28 U.S.C. 1658(b) (2006)); see also Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 950 (9th Cir. 2005) (explaining how the Sarbanes-Oxley Act extended the statute of limitations). "The two-year statute of limitations is not subject to equitable tolling." In re Juniper Networks, Inc. Sec. Litig., 542 F. Supp. 2d at 1050. In addition, "[t]he five-year outer limitations... serves as a statute of repose." Id. It acts as "a fixed, statutory cut off date,... independent of any variable, such as claimant's awareness of a violation." Munoz v. Ashcroft, 339 F.3d 950, 957 (9th Cir. 2003). The Supreme Court recently noted that the general securities fraud statute of limitations acts as "an unqualified bar on actions instituted '5 years after such violation'... giving defendants total repose after five years." Merck & Co., Inc. v. Reynolds, U.S., 130 S. Ct. 1784, 1797 (2010) (citation omitted). "[T]he five-year period begins to run with respect to each violation when it occurs. A plaintiff may not recover for reliance on representations made prior to the five-year statute of limitation period under a theory of continuing wrong." In re Juniper Networks, Inc. Sec. Litig., 542 F. Supp. 2d at 1051. Here, Plaintiffs filed suit against Defendants on May, 16, 2011, alleging that Defendants "engaged in a common enterprise to sell unqualified and unregistered securities in a fraudulent real estate investment scheme." (Compl. 22.) Pursuant to the Sarbanes-Oxley Act, the five-year statute of limitations for "claim[s] of fraud, deceit, manipulation or contrivance in contravention of a regulatory requirement concerning the securities laws" is applicable to the Complaint. See 28 U.S.C. 1658(b). The parties do not dispute that the purchase of the properties and the closing of escrow took place in 2005. As such, Plaintiffs' claims cannot be based on any acts that occurred prior to May 16, 2006. Plaintiffs' Complaint, however, is void of any factual allegations relating to the date of the alleged fraudulent acts of Defendants and, therefore, Plaintiffs fail to sufficiently plead their federal securities fraud claims. Accordingly, the Court DISMISSES WITHOUT PREJUDICE Plaintiffs' securities fraud claims based on sections 10(b) and 20(a) of the Exchange Act of 1934, and SEC Rule 10b-5. C. Heightened Pleading Standard Plaintiffs also fail to meet the heightened pleading standard applicable to their federal securities fraud claims. The Ninth Circuit has held that "[i]t is well established that claims brought under [SEC] Rule 10b-5 and [s]ection 10(b) [of the Exchange Act of 1934] must meet the particularity requirements of [Rule] 9(b)." In re Daou Sys., Inc., 411 F.3d 1006, 1014 (9th Cir. 2005). Rule 9(b) requires that, "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). "Thus, a complaint for securities fraud must specify, 'the Page 3 of 5
Case 2:11-cv-04175-SJO -PLA Document 11 Filed 08/10/11 Page 4 of 5 Page ID #:106 who, what, when, where and how: the first paragraph of any newspaper story.'" Henning v. Orient Paper, Inc., No. CV-10-5887, 2011 WL 2909322, at *2 (C.D. Cal. July 20, 2011) (citing In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 998 (9th Cir. 1999)). Moreover, "[u]nder the heightened pleading standard of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. 78u-4(b)(1), complaints alleging misrepresentations or omissions under 10b-5 must 'specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.'" Glazer Capital Mgmt, LP v. Magistri, 549 F.3d 736, 741 (9th Cir. 2008). "Where a plaintiff asserts a [s]ection 20(a) claim based on an underlying violation of [s]ection 10(b), the pleading requirements for both violations are the same." In re Bank of Am. Corp., No. 09-MD-02014, 2011 WL 740902, at *6 (N.D. Cal. Feb. 24, 2011). Here, Plaintiffs' Complaint fails to meet the heightened pleading standard under both Rule 9 and the PSLRA. As aforementioned, Plaintiffs do not specify when alleged misrepresentations or omissions were made. They only allege that they discovered the "fraud and investment scheme" "in late 2009." (Compl. 42.) Plaintiffs also do not aver who made the alleged misrepresentations or omissions. For instance, Plaintiffs generally aver that "members of the fraudulent investment scheme" "induced [unsophisticated investors] into believing they were dealing with a financial advisor." ( Id. 26.) Yet, Plaintiffs never identify who these individuals are. Similarly, Plaintiffs also do not specify each statement alleged to have been misleading. Plaintiffs allege that Defendant National Title "failed to disclose accurate loan terms and fees," but never specifies what those terms and fees are. (Id. 28.) Accordingly, Plaintiffs' claims one and two do not meet the heightened pleading requirements of Rule 9(b) and the PSLRA and are DISMISSED WITHOUT PREJUDICE. D. Supplemental Jurisdiction Pursuant to 28 U.S.C. 1367, the district court must have original jurisdiction of one claim in order to invoke supplemental jurisdiction of other claims. See 28 U.S.C. 1367 (2006). A district court loses supplemental jurisdiction if it "dismisse[s] all claims over which it ha[d] original jurisdiction." Id. A district court may decide not to dismiss supplemental state claims by considering factors such as judicial economy, convenience, fairness, and comity. Imagineering, Inc. v. Kiewit Pac. Co., 976 F.2d 1303, 1309 (9th Cir. 1992). "[I]n the usual case in which federal law claims are eliminated before trial, the balance of factors... will point toward declining to exercise jurisdiction over the remaining state law claims." Reynolds v. Cnty. of San Diego, 84 F.3d 1162, 1171 (9th Cir. 1996) overruled on other grounds by Acri v. Varian Assocs., Inc., 114 F.3d 999, 1000 (9th Cir. 1997). Some Courts of Appeals have gone even further and have held that, absent extraordinary or unusual circumstances, federal courts should not retain jurisdiction. See, e.g., Musson Theatrical, Inc. v. Fed. Express Corp., 89 F.3d 1244, 1255 (6th Cir. 1996) ("When all federal claims are eliminated before trial, the balance of factors will point to declining jurisdiction.") (internal quotation marks omitted); Wentzka v. Gellman, 991 F.2d 423, 425 (7th Cir. 1993) Page 4 of 5
Case 2:11-cv-04175-SJO -PLA Document 11 Filed 08/10/11 Page 5 of 5 Page ID #:107 ("Where a federal claim drops out before trial, a district court should not retain the state claims absent extraordinary circumstances."). For the case at hand, the Court has dismissed Plaintiffs' federal claims. Moreover, there is no diversity jurisdiction because complete diversity does not exist. See 28 U.S.C. 1332(a) (2006). Plaintiff Mario Gonzales and Defendant National Title are indisputably residents of Nevada. (Compl. 7, 8.) The only remaining claim is a state law fraud claim, for which the state court has a greater interest in and is far better suited to resolve. Indeed, as both parties point out, California state courts have resolved or are currently presiding over disputes that stem from the same set of facts. Dismissal with leave to re-file in state court will also benefit the federal system by allowing the Court to devote its scarce resources to resolving federal issues. Accordingly, the Court declines to exercise jurisdiction over Plaintiff's state law fraud claim and it is DISMISSED WITHOUT PREJUDICE. III. RULING For the foregoing reasons, Plaintiffs' Complaint is DISMISSED. Plaintiffs are granted leave to refile their state law fraud claim in state court. Plaintiffs are also hereby ordered to file a First Amended Complaint consisting only of their federal securities claims that comply with this Order on or before September 12, 2011. Failure to do so may lead to a dismissal of this action for lack of prosecution and failure to comply. IT IS SO ORDERED. Page 5 of 5