Opinion
No. 2:19-cv-00177-MCE-AC
07-30-2020
INNOVATIVE BOWLING PRODUCTS, LLC, a Pennsylvania limited liability company; JOHN JAMESON, an individual; and DAVID LYNCH, an individual, Plaintiffs, v. EXACTACATOR, INC., a California corporation; JAMES NESBITT, an individual; BARBARA NESBITT, an individual; STEPHEN GROOM, an individual; SHELLEY ROGERS, an individual, NAKASHIMA GOLF, INC., a California corporation, Defendants. EXACTACATOR, INC., a California corporation, Counterclaimant, v. INNOVATIVE BOWLING PRODUCTS, LLC, a Pennsylvania limited liability company, JOHN JAMESON, an individual, and DAVID LYNCH, an individual, Counter-Defendants.
MEMORANDUM AND ORDER
Through the present lawsuit, Plaintiff Innovative Bowling Products, Inc. ("IBP") and its Chief Executive Officer, Plaintiff John Jameson (collectively "Plaintiffs" unless otherwise specified) seek redress for business disputes surrounding Plaintiffs' purchase, management and control of another company, Defendant Exactacator, Inc. ("Exactacator"). During the pendency of the purchase, Exactacator's former majority owners, James and Barbara Nesbitt, continued to be involved in joint operations pertaining to IBP and Exactacator. Both Nesbitts are named as Defendants in Plaintiffs' operative First Amended Complaint ("FAC"), as are the Nesbitts' daughter, Shelley Rogers, Exactacator's accountant, Stephen Groom, the Nesbitts' business partner, John Nakashima, and Nakashima's business, Nakashima Golf, Inc. The jurisdiction of this court is predicated upon diversity of citizenship under 28 U.S.C. § 1332(a)(1). IBP is a Pennsylvania limited liability company and Jameson is a Pennsylvania resident. Exactacator and Nakashima Golf, on the other hand, are California corporations and the individually-named Defendants are all California residents.
In response to the FAC's fourteen claims for relief pled against the various defendants, two motions to dismiss made pursuant to Federal Rule of Civil Procedure 12(b)(6) are now before this Court for adjudication. The first Motion (ECF No. 30), brought by Defendant Exactacator, challenges the first four causes of action pled in the FAC on grounds they fail to state any viable claim. Exactactor's Motion also seeks to strike paragraphs 105-111 of the FAC on grounds that the allegations are immaterial and impertinent and are consequently subject to removal under Rule 12(f). The second Motion (ECF No. 40), brought on behalf of all named Defendants, takes issue with the /// /// /// /// eleventh and thirteenth causes of action, also on grounds that they fail to state any viable claim under Rule 12(b)(6). As set forth below, Defendants' Motions are GRANTED in part and DENIED in part.
All further references to "Rule" or "Rules" are to the Federal Rules of Civil Procedure unless otherwise noted.
Plaintiffs' Thirteenth Claim for Relief was the only claim in this lawsuit being asserted by Plaintiff David Lynch, who according to the FAC provided financial services to IBP through his company, Lynch Financial, LLC. By Stipulation and Order approved by the Court on February 14, 2020, it was agreed that Lynch would file a Request for Dismissal, without prejudice, as to that claim, which alleges defamation per se against the Nesbitt Defendants. See ECF No. 54. Although the Court's review of the docket in this matter does not indicate that the Thirteenth Claim has formally been dismissed, since no opposition to the Motion to Dismiss as to that claim has been made, the Court will treat the claim as not being pursued at this juncture and will not address it further in this Memorandum and Order. Consequently, Defendants' Motion to Dismiss filed on January 9, 2020 (ECF No. 40), will be considered only insofar as it challenges the Eleventh Claim for Relief, which seeks an accounting.
Having concluded that oral argument would not be of material assistance, both Motions were submitted on the briefs in accordance with E.D. Local Rule 230(g).
BACKGROUND
This section is drawn, sometimes verbatim, from the allegations contained in Plaintiffs' FAC (ECF No. 27), unless otherwise specified.
Prior to January 2014, when it purchased Exactacator's assets, IBP engaged in the manufacture and sale of commercial bowling equipment (ball mills/drills and engravers) from its facility in York, Pennsylvania. Exactacator, on the other hand, fabricated and sold consumer bowling products such as bags, gloves, shirts and ball finger inserts under the "VISE" brand from a location in Stockton, California.
To effectuate the sale of Exactacator's business to IBP, IBP and Exactacator entered into a series of agreements beginning in December of 2013. Through the so-called Asset Purchase Agreement ("APA", attached as Ex. A to Def. IBP's Mot., ECF No. 30-1), IBP acquired most of Exactacator's assets, including its inventory, personal property, goodwill, and contracts rights, in exchange for $6 million to be paid, pursuant to a leveraged buyout, in three $2 million payments over ten years (referred to as the "Purchase Consideration" in the APA). The first $2 million payment, denominated as the "Cash Consideration," was to be made at closing; the remaining two payments, payable on January 1, 2019 and January 1, 2024 at $2 million each, respectively, were evidenced by a Promissory Note (id. at Ex. C) guaranteed by Plaintiff Jameson personally. IBP also entered into a written Security Agreement with Exactacator (id. at Ex. D) under which it gave Exactacator a security interest in the VISE assets.
Because the APA and the other agreements were extensively discussed within the FAC, Defendant IBP properly attached the documents to its Motion for the Court's review and consideration in accordance with the incorporation-by-reference doctrine, under which a defendant may seek to incorporate a document into the complaint "if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff's claim." Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1002 (9th Cir. 2018).
According to the FAC, during negotiation of the APA and related documents, the parties recognized that IBP would likely need to borrow funds from a bank to make each of the three Purchase Consideration payments. The FAC states: "Because everyone knew that a third-party lender would likely require a security interest in the same VISE Assets covered by Exactacator's Security Agreement, Exactacator agreed to subordinate its security interest to the third-party lender for the total amount of the Note." FAC, ¶ 51. In order to do that, according to Plaintiffs, the APA contains the following language under the heading "Purchase Consideration", which addresses both the initial $2 million "Cash Consideration" to be paid at closing and the additional $4 million obligation secured by the Promissory Note:
Pursuant to the Security Agreement, [Exactacator] shall have a second priority security interest in all assets of [IBP], including, without limitation, the Assets which are the subject of this Agreement, and a first priority interest in [IBP's] rights under the [Joint Venture] Agreement.APA, ¶ 2.
The APA goes on to confirm that the lender providing the Acquisition Financing (which is defined as the initial Cash Consideration plus an additional $500,000 line of credit) "will have a first prior interest in Buyer's assets, including the Assets that are the subject of this Agreement." Id. at ¶ 4(b). While that language addresses only the consideration to be paid at closing, the paragraph goes on to contemplate the potential for additional borrowing, stating as follows: ///
The Parties agree that until the Note is paid in full any indebtedness of Buyer which is secured by Buyer's assets, including, without limitation, the Acquisition Financing, shall not have an outstanding balance in excess of $4,500,000, which amount may include sums borrowed by [IBP] to fund the principal payments due under the Note.Id. at ¶ 4(b).
IBP maintains that the above-enumerated provisions, considered together, reflect the parties' intent that Exactacator would subordinate its security interest to the funding necessary to make the additional payments, up to a maximum of $4,500,000. With respect to the initial Acquisition Financing provided by Metro Bank, the Nesbitts did execute, on behalf of Exactacator, an Intercreditor and Subordination Agreement (Ex. E. to Def.'s Mot., ECF No. 30-5) confirming that Metro Bank's interest in the assets pledged as collateral was superior to that of Metro Bank.
Post-acquisition, IBP operated as two divisions, the so called "York" division in Pennsylvania, and the VISE division in Stockton (which comprised the former Exactacator operations). The York division continued to manufacture and sell bowling industry equipment; the VISE division, as previously stated, made and sold consumer products under the VISE brand. IBP continued to pay the salary and benefits of several former Exactacator employees, including Defendant Barbara Nesbitt and her daughter, Defendant Shelley Rogers, who together managed and controlled the VISE division's financial books and records along with payroll and accounts receivable and payable.
Along with the APA, the Promissory Note and Security Agreement made in connection therewith, as part of the Exactacator sale, the parties also entered into a Joint Venture Agreement ("JVA", id. at Ex. B) which provided that Exactacator would receive the greater of either half of IBP's annual profits annually over the same ten-year period, or $750,000. Given Exactacator's continued interest in IBP's business operation following the sale, the JVA contained a statement of purpose as follows: /// ///
1.01 Purpose . . . This Agreement is being entered into pursuant to the [APA] in order to facilitate, promote and further the development and expansion of [IBP's] business involving the manufacture and sale of bowling ball interchangeable parts and devices, including, without limitation, the "VISE" product line purchased by [IBP] from Exactacator.Id. at ¶ 1.01.
Given the JVA's stated objective to facilitate the expansion of IBP's business, the JVA further contains a cooperation clause obligating Exactacator to "execute such other and further instruments and documents as are or may become reasonably necessary to effectuate and carry out the purposes of this Agreement." Id. at ¶ 10.07.
IBP maintained separate accounts to monitor each division's income and expenses, and calculated a consolidated income figure at least once a year in order to calculate the profit share due Exactacator pursuant to the JVA. In order to determine the yearly profit-sharing amount and to further the purpose of the joint venture, the JVA also established a Joint Venture Management Committee ("JVMC"). The JVMC initially consisted of three members: Plaintiff Jameson, Defendant Jim Nesbitt and Exactacator's accountant, Defendant Groom. Later, in September of 2016, the JVA was amended to add two additional members, Defendant John Nakashima and Plaintiff David Lynch, IBP's outside financial consultant and Chief Financial Officer. Under the JVA, decisions made by the JVMC were to be made by majority vote.
Between January 2014 and January 2018, IBP alleges that it made each annual payment required under the JVA in amounts that totaled more than $3.2 million. IBP further had managed to repay the initial $2 million Metro Bank loan, which Plaintiff Jameson claims increased his member equity in IBP from a negative number to more than $2 million. Jameson claimed the business was thriving, with net income increasing by some 60 percent.
Plaintiffs maintain that it was IBP's very success, in an unbridled case of "sellers' remorse," that bred this lawsuit. Indeed, not long after the sales transaction closed, the FAC alleges that Barbara Nesbitt made it known to her husband that she wanted Exactacator back and was angry at her husband for having sold it. When Jameson refused to undo the sale, Jameson alleges that Jim Nesbitt told him that "you will feel the wrath of Jim Nesbitt. . . I will make you my indentured servant and destroy you." FAC, ¶ 5.
Plaintiffs claim that over the course of the following five years, the Nesbitts did everything they could to follow through with this threat, expressing numerous disagreements as to Jameson's decisions regarding the day-to-day business operations of IBP. According to the FAC, matters came to a head before the second $2 million installment in the $6 million purchase price was due on January 1, 2019. In November 2018, Plaintiffs obtained a loan commitment from People's Bank for $1.8 million and an additional $1.2 million line of credit that would have enabled it to not only make the second $2 million payment but also provide more operating capital to obtain the additional inventory needed to satisfy increased sales. The People's Bank commitment included the expected requirement that Exactacator sign a new subordination agreement that would maintain its junior security position as to the acquired VISE assets. Although IBP claims the total amount of the People's Bank loan would have entailed only a $250,000 increase from the initial arrangements made in 2014, the Nesbitts objected to the proposal, initially only with respect to the increase in the line of credit and did so only two weeks before the loan was scheduled to close even though notice of the increased line of credit had been given to the JVMC some six months previously.
The original lender, Metro Bank, had been acquired by First National Bank ("FNB"), and according to Plaintiffs, FNB was not interested in extending the previous acquisition loan because FNB was in Pennsylvania and Much of the IBP collateral was in California. See FAC, ¶¶ 63, 158. IBP, however, was able to go to the same loan officers who underwrote the original Metro Bank loan, who had since relocated to People's Bank. Plaintiffs aver that the loan commitment obtained from People's Bank for the second $2 million payment had terms nearly identical to those on the original loan to which the Nesbitts had subordinated in 2014.
IBP responded by securing a new loan commitment that it claims would simply have maintained the status quo, given that the Metro Bank loan had been paid off. The Nesbitts nonetheless continued to refuse to sign the subordination agreement, acting on what Plaintiffs describe as a "long sought-after chance to take back the VISE assets they sold in 2014." FAC, ¶ 25. Plaintiffs claim that the Nesbitts gave no further explanation for their refusal to subordinate on the new loan other than that they were not required to do so.
Faced with a default on the second $2 million loan installment which had been due on January 1, 2019, Plaintiffs filed the present lawsuit on January 25, 2019. Subsequently, the Nesbitts not only declared IBP's loan in default but also, according to Plaintiffs, diverted up to $5 million in IBP accounts receivable to a new Bank of Stockton checking account to which neither IBP nor Jameson had access. In doing so, Plaintiffs claim that Defendants Jim Nesbitt, Nakashima and Groom (with the aid and assistance of Defendants Barbara Nesbitt and Rogers) violated the fiduciary duties they owed to IBP as members of the JVMC to promote the development and expansion of IBP's business. By "starving" IBP of cash through the above-described diversion of receivables, Plaintiffs allege that Defendants caused IBP to be unable to meet its payroll obligations and in so doing to irretrievably alienate many of IBP's employees.
The Nesbitts only effort to resolve the crisis occasioned by their failure to subordinate was a demand that Defendant Jameson agree to an additional amendment of the JVA that Plaintiffs claim would have significantly changed the terms of the 2014 sale by Exactacator. First, the Nesbitts required that any loan for the second $2 million installment be made from them personally on terms that were apparently substantially less beneficial than those offered by People's Bank. Second, the Nesbitts demanded increased profit-sharing amounts, and the recoupment of expenses totaling some $339,500. Finally, they demanded that certain royalty payments to their daughter, Defendant Rogers, be extended by five additional years. Plaintiffs allege that these terms, if accepted, would have required IBP to pay more than $1 million more than that already agreed to in the 2014 transaction, not to mention the fact that Jameson would have been required to cede significant control of IBP to the Nesbitts and Nakashima. According to Jameson, the Nesbitts claimed that these changes were not negotiable and that he had no choice other than to accept them. Claiming that the Nesbitts' efforts amounted to "extortion," Jameson rejected their proposals.
Once Plaintiffs instituted the present lawsuit on January 25, 2019, Exactacator filed a counterclaim asserting Plaintiffs default on the scheduled 2019 payment, which Plaintiffs claim was "self-manufactured" by the Nesbitts for the reasons enumerated above. The counterclaim did not stop with that alleged breach of contract, however. It went on to accuse Plaintiffs of what they allege are utterly unfounded claims of fraud, RICO racketeering, wire and mail fraud, and other rots of financial wrongdoing concerning IBP and the Joint Venture. Plaintiffs allege that there was no basis whatsoever for the counterclaim, and indicate that even Jim Nesbitt, who was designated by Exactacator as its Rule 30(b)(6) witness for the facts underlying the counterclaim, could point to no evidentiary support justifying it.
STANDARD
A. Motion to Dismiss under Rule 12(b)(6)
On a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) "requires only 'a short and plain statement of the claim showing that the pleader is entitled to relief' in order to 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint attacked by a Rule 12(b)(6) motion to dismiss does not require detailed factual allegations. However, "a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (internal citations and quotations omitted). A court is not required to accept as true a "legal conclusion couched as a factual allegation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555 (citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1216 (3d ed. 2004) (stating that the pleading must contain something more than "a statement of facts that merely creates a suspicion [of] a legally cognizable right of action")).
Furthermore, "Rule 8(a)(2). . . requires a showing, rather than a blanket assertion, of entitlement to relief." Twombly, 550 U.S. at 555 n.3 (internal citations and quotations omitted). Thus, "[w]ithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirements of providing not only 'fair notice' of the nature of the claim, but also 'grounds' on which the claim rests." Id. (citing Wright & Miller, supra, at 94, 95). A pleading must contain "only enough facts to state a claim to relief that is plausible on its face." Id. at 570. If the "plaintiffs . . . have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed." Id. However, "[a] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that a recovery is very remote and unlikely.'" Id. at 556 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).
A court granting a motion to dismiss a complaint must then decide whether to grant leave to amend. Leave to amend should be "freely given" where there is no "undue delay, bad faith or dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of the amendment . . . ." Foman v. Davis, 371 U.S. 178, 182 (1962); Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (listing the Foman factors as those to be considered when deciding whether to grant leave to amend). Not all of these factors merit equal weight. Rather, "the consideration of prejudice to the opposing party . . . carries the greatest weight." Id. (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 185 (9th Cir. 1987)). Dismissal without leave to amend is proper only if it is clear that "the complaint could not be saved by any amendment." Intri-Plex Techs. v. Crest Group, Inc., 499 F.3d 1048, 1056 (9th Cir. 2007) (citing In re Daou Sys., Inc., 411 F.3d 1006, 1013 (9th Cir. 2005); Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989) ("Leave need not be granted where the amendment of the complaint . . . constitutes an exercise in futility . . . .")).
B. Motion to Strike
The Court may strike "from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed. R. Civ. P. 12(f). "[T]he function of a 12(f) motion to strike is to avoid the expenditure of time and money that must arise from litigating spurious issues by dispensing with those issues prior to trial...." Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983). Immaterial matter is that which has no essential or important relationship to the claim for relief or the defenses being pleaded. Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993), rev'd on other grounds 510 U.S. 517 (1994) (internal citations and quotations omitted). Impertinent matter consists of statements that do not pertain, and are not necessary, to the issues in question. Id.
ANALYSIS
A. Subordination
Defendant Exactacator moves to dismiss the first four causes of action of Plaintiffs' FAC, which it describes as IBP's "contract-related claims." Those claims seek specific performance (Claim One), allege breach of contract as to the APA and JVA (Claim Two), as well as breaches of the covenant of good faith and fair dealing attendant to those contracts (Claim Three), and further seek declaratory judgment and injunctive relief as to Exactacator's failure to perform in a manner consistent with its agreements (Claim Four). According to Exactacator, all these claims are predicated on the legally incorrect premise that Exactacator was obliged to sign an agreement subordinating its security position behind that of the lender providing financing for IBP's payment of the second purchase installment due Exactacator in 2019. Exactacator maintains that the agreements effectuating the IBP sale are susceptible of no meaning beyond the inescapable conclusion that it was required to subordinate its security position only to the extent IBP borrowed monies to pay the initial $2 million to purchase the company. Exactacator's Motion to Dismiss IBP's first four causes of action all rest upon that contention.
Plaintiffs have not opposed Exactacator's Motion to Dismiss the Fourth Claim as duplicative of Plaintiffs' previous three causes of action. In the absence of any opposition, the Motion is GRANTED as to said Fourth Claim.
The Court is unpersuaded by Exactacator's arguments. As indicated above, the APA broadly provides that Exactacator "shall have a second priority security interest in all assets of [IBP], including, without limitation, the Assets which are the subject of [the APA", and a first priority interest in "[BP's] rights under the (JVA]." APA, ¶ 2. While the term "Assets," as used in the APA, is specifically defined to include the various property rights sold to IBP under the APA (id. at ¶ 1), the language employed by the APA sweeps more broadly in extending Exactacator's second priority interest to any other undefined "asset" whatsoever, without limitation. Given that all-encompassing language, the Court cannot rule out that second-priority status would apply to all loan arrangements, particularly since the only item reserved for first-priority treatment was IBP's rights under the JVA.
Significantly, too, the APA goes on to specifically permit IBP to acquire additional indebtedness up to a maximum of $4.5 million, which the agreement specifically acknowledges "may include further sums borrowed by [IBP] to fund the principal payments due under the Note." Id. at ¶ 4(b). The Court agrees that Paragraphs 2 and 4(b), considered together, are consistent with Plaintiffs' argument that Exactacator was obligated to accept a second priority interest in financing obtained by IBP to fund the second $2 million payment. Because the initial $2 million loan obtained for the first purchase installment had already been paid off, IBP's indebtedness as of the time it secured was well below the $4.5 million threshold. Therefore, under Plaintiffs' construction, Exactacator was obligated to subordinate to an additional loan for the second installment but wrongfully refused to do so.
Although the Court cannot consider parol evidence in the context of a motion to dismiss, it also bears noting that, at least according to the FAC, the parties specifically contemplated the need for additional financing, with Exactacator continuing to assume a second priority interest as to such financing, and the APA being revised to anticipate that eventuality. According to Plaintiffs, Jameson told Jim Nesbitt and Stephen Groom several times during the course of the parties' purchase negotiations that he would need to be able to borrow additional funds to finance future installment payments. See FAC, ¶ 51. Plaintiffs not only cite those conversations, but claim that the Nesbitts' lawyer, Kim Smith, revised Paragraphs 2 and 4(b) of the APA to permit that eventuality. Moreover, Plaintiffs claim that contemporaneous notes taken by Stephen Groom during the negotiations reflect that even Barbara Nesbitt believed that bank renewal should be permitted. See Pls.' Opp., ECF No. 43, pp. 4-6.
As Plaintiffs point out, California has a liberal parol evidence rule under which such evidence is admissible to clarify the parties' intent, so long as it is consistent with reasonably interpreting the contract. Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 37 (1968). This Court has previously observed that "[p]arol evidence is admissible to show all circumstances surrounding a transaction in order to determine the meaning intended and understood by the parties." United States v. Sterling Centrecorp Inc., 2011 WL 6749801 at *6 (E.D. Cal. 2011). Parol evidence is precluded only if it contradicts the agreement itself, and as set forth above it appears to the Court that the parties' agreement here is susceptible to Plaintiffs' interpretation and, by extension, the parol evidence Plaintiffs could offer in support thereof. See Rader v. Bruister, 2010 WL 2179799 at *4 (E.D. Cal. 2010); citing U.S. v. Triple A Mach. Shop, Inc., 857 F.2d 579, 585 (9th Cir. 1988).
The Court is further unpersuaded by Exactacator's argument that because the Security Agreement and Promissory Note executed by the parties did not refer to a second priority interest, no such interest was contemplated. As Plaintiffs point out, both those documents necessarily focus on Plaintiffs' obligations to Exactacator (in giving it a security interest in the purchased assets and in promising to pay the remaining purchase price), and would not be expected to reflect duties owed by Exactacator as opposed to those falling to Plaintiffs.
Plaintiffs' reliance on the APA's so-called "Integration Clause," as contained in Paragraphs 12.2 of the APA, fares no better for two reasons. First, as indicated above, the Court finds the language of the APA to be at least potentially consistent with Plaintiffs' argument, and as such the Integration Clause does not bar Plaintiffs' position herein. Second, as Plaintiffs point out, because the APA refers to numerous other associated documents (like the JVA and Security Agreement) that were not executed until as much as six weeks later, the Integration Clause has no force and effect since the APA was not integrated anyway in the absence of specifically referenced agreements (including the JVA, the Promissory Note, the Security Agreement and an Intercreditor Agreement) that had not yet been prepared. A written agreement is deemed "integrated only if it is "a complete and final embodiment of the terms of the agreement" (see Masterson v. Sine, 68 Cal. 2d 222, 225 (1968), and the fact that the referenced documents had not yet been prepared makes any integration of the APA at the time it was signed impossible.
The Integration Clause states: "This Agreement constitutes the entire agreement and supersedes all prior and contemporaneous agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof." Id. at ¶ 12.2
Moreover, to the extent that Exactacator was obligated under the APA to assume a second priority position with respect to Plaintiffs' additional 2018 financing, that failure evidences a breach not only of the APA but also the JVA. As enumerated above, the stated purpose of the JVA is to "facilitate, promote and further the development and expansion" of IBP, and to that effect it required Exactacator to "execute each such other and further instruments and documents as are or may become reasonably necessary or convenient to effectuate" that purpose. JVA, ¶¶ 1.01, 10.07. Exactacator's position with respect to subordination; namely, that it did not agree to a second security position with respect to additional financing because it was not required to do so, may well be incorrect. Therefore, particularly given Plaintiffs' allegations that Exactacator's agreement as to subordination was not only required but also necessary in order to further IBP's business (IBP claims it needed additional financing in order to acquire additional inventory in the face of rapidly burgeoning sales), Exactacator's refusal to subordinate (which Plaintiffs claim any bank would have insisted upon as a prerequisite to extending a further commercial loan to IBP) would appear to be a breach of both the APA and the JVA. Consequently, Exactacator's Motion to Dismiss Plaintiffs' Claim Two, which alleges such breaches, must be DENIED.
With respect to Plaintiffs' First and Third Claims, which seek specific performance and damages for breach of the implied covenant of good faith and fair dealing, respectively, Exactacator's arguments for dismissal depend upon there being no possibility of a breach in the first place (see Mot., ECF No. 30, 8:20-25). Because the Court disagrees with that fundamental premise, Exactacator's challenge to those claims also fails.
B. Claim for Accounting
For an eleventh cause of action, Plaintiffs seek an accounting from all Defendants. The so-called Exactacator-affiliated Defendants (Defendants James and Barbara Nesbitt, Shelley Rogers, John Nakashima, and Nakashima Golf, Inc.), but not Defendant Exactacator itself, move to dismiss the accounting claim against them, alleging that "the FAC does not allege any complex accounts that would require an accounting" and further contains no allegations that they "owe IBP any sum, let alone a sum that cannot be ascertained without an accounting." Mot., ECF No. 40, 2:18-20.
An action for accounting, which is equitable in nature, may be brought to compel a defendant to account for money or property 1) where a special relationship exists between the parties, or 2) where, even though no fiduciary relationship exists, the accounts are so complicated that an ordinary legal action demanding a fixed sum is impracticable. See Herrejon v. Ocwen Loan Servicing, LLC, 980 F. Supp. 2d 1186, 1207 (E.D. Cal. 2013); Civic Western Corp. v. Zila Industries, Inc., 66 Cal. App. 3d 1, 14 (1977). "A cause of action for an accounting requires a showing that a relationship exists between the plaintiff and defendant that requires an accounting, and that some balance is due the plaintiff that can only be ascertained by an accounting." Teselle v. McLaughlin, 173 Cal. App. 4th 156, 179 (2006). A fiduciary relationship between the parties suffices but is not mandatory; all that is required is that some relationship exists that requires an accounting. See Kritzer v. Lancaster, 96 Cal. App. 2d 1, 6-7 (1950). Typically, to require an accounting, there must be a complexity of the accounts that makes demanding a fixed sum impracticable. Herrejon v. Ocwen Loan Servicing, LLC, 980 F. Supp. 2d at 1207.
While defense counsel does not dispute the availability or relief in the form of an accounting from Exactacator, it argues that there has been no showing that any of the Exactacator-affiliated Defendants took any funds from IBP or owe any money to the company that would require an accounting. Counsel contends that IBP has not explained why an accounting from Exactacator alone would be insufficient. Moreover, according to counsel, IBP has not shown any special relationship between it and either Defendant Nakashima Golf, Defendant Barbara Nesbitt, or Nesbitt's daughter, Defendant Shelley Rogers, that would justify an accounting. Additionally, while counsel concedes that Defendants Jim Nesbitt and John Nakashima were members of the Joint Venture Management Committee tasked with running the Joint Venture between IBP and Exactacator, and despite the fact, as indicated above, that the JVA's stated purpose was to promote IBP in the interest of all concerned, counsel still argues that neither Mr. Nesbitt or Mr. Nakashima should be accountable in a fiduciary fashion to IBP, allegedly since they were Exactacator-appointed, as opposed to IBP, representatives on the Committee.
Plaintiffs, in opposition, put matters into a starkly different perspective. As the FAC alleges, the Exactacator-affiliated Defendants, as the officers, directors and/or sole (or) majority shareholders of both Exactacator and Nakashima Golf, are alleged to have masterminded the diversion of nearly $5 million dollars in accounts receivable payments allegedly belonging to IBP into a Bank of Stockton account where only they were signatories. Defendants did this at the same time they were employees of IBP (Jim and Barbara Nesbitt and Shelley Rogers), officers of IBP (John Nakashima), and members of the JVMC tasked with facilitating IBP's success under the JVA (Defendants Jim Nesbitt and John Nakashima). Plaintiffs allege that these relationships carry various fiduciary duties owed to IBP. Notwithstanding those duties, according to Plaintiffs, Defendants have never accounted for those diverted funds, explained an inexplicable increase in gross profits from the VISE division of IBP that would inure to their benefit, or allowed Plaintiff Jameson, as the sole member of IBP, to gain access to IBP's own computers to enable a forensic accounting. Moreover, Plaintiffs maintain that the Defendants have rejected numerous requests for a joint forensic accounting that could unravel the financial conundrum allegedly created by their actions.
Plaintiffs' FAC points out the many interrelationships both between the Exactacator-affiliated Defendants themselves and with IBP. John Nakashima, together with the Nesbitts, is one of the controlling shareholders of Exactacator and Nakashima is both Vice-President of Exactacator and the President of IBP's VISE division. Nakashima Golf is a California corporation operating at the same location as both Exactacator and IBP's VISE division. The Nesbitts and Nakashima are also the officers, directors and controlling shareholders of Nakahima Golf. At the same time, as indicated above, both Jim and Barbara Nesbitt, together with their daughter, Shelley Rogers, are employees of IBP. Plaintiffs allege that Exactacator paid Nakashima Golf some $63,000 from the funds Defendants diverted to the Bank of Stockton account to engage in sham transaction designed to usurp IBP's business opportunities. Both Barbara Nesbitt and Shelley Rogers, while allegedly responsible for performing accounting and financial functions for the VISE division, are claimed to have participated in the diverting funds /// away from IBP even though both were ostensibly employees of IBP. Defendant Rogers is also alleged to have received certain royalty payments, despite the fact that under the terms of the JVA no such payments were due until 2024.
While an accounting is not usually necessary between an employer and employee, the IBP employees here (Defendants Jim and Barbara Nesbitt and their daughter, Shelly Rogers) are alleged to have been in control of IBP's records, and received monies intended for IBP such that IBP itself does not know the amounts involved. Under those circumstances, an accounting is proper. See Arbuckle v. Clifford F. Reid, Inc., 118 Cal. App. 272, 275-76 (1931).
Accepting the FAC's factual allegations as true, which the Court must do on a motion to dismiss under Rule 12(b)(6) (see Cahill v. Liberty Mut. Ins. Co., supra, 80 F.3d at 337-38), Plaintiffs have amply demonstrated their entitlement to an accounting to untangle the web of malfeasance that their allegations purport to document, and in the process to establish what if any funds were improperly diverted. Defendants' Motion to Dismiss the accounting claim is accordingly DENIED.
C. Striking Allegations Pertaining to Exactacator's Counterclaim
In addition to moving to dismiss Claims One through Four of Plaintiffs' FAC as discussed above, Exactacator also moves to strike Paragraphs 105 to 111, which allege that a counterclaim filed on March 25, 2019 along with Exactacator's answer to Plaintiffs' original Complaint (ECF No. 7) was malicious and devoid of any evidentiary support. Exactacator first argues that the Counterclaim is moot because the Complaint to which it related was superseded by the filing of the FAC on November 22, 2019, with no renewed counterclaim being asserted as to that amended pleading. In addition, and more fundamentally, Exactacator claims that because the counterclaim was prepared in the course of these proceedings any allegations as to its impropriety are barred by California's litigation privilege, as codified by California Civil Code § 47(b). That privilege protects communications that 1) are made in the course of legal proceedings; 2) by litigants or other participants authorized by law; 3) to achieve the objects of the litigation; and 4) have some connection or logical relation to the action. See Silberg v. Anderson, 50 Cal. 3d 205, 212 (1990). As Silberg points out, the litigation privilege is intended to promote zealous advocacy by removing the threat of liability, and has been applied to numerous instances of alleged abuse of process, as Plaintiffs appear to argue here. Id. at 212-214.
Aside from arguing that the their allegations concerning the counterclaim should not be read in isolation, but instead should be considered in conjunction with the entire course of conduct towards Plaintiffs by Exactacator and by the Nesbitts, Plaintiffs primarily rely upon the paragraphs at issue with respect to the Thirteenth Claim for Relief, which alleged defamation by the Nesbitts against David Lynch. Plaintiffs argue that the allegations made in the counterclaim evince the malice needed to support a defamation claim. As indicated above, however, Plaintiffs' counsel indicates he is no longer pursuing a defamation claim and consequently has not opposed the dismissal request as to that cause of action.
In the Court's view, allegations pertaining to a counterclaim filed by Exactacator in the course of this litigation fall squarely within the litigation privilege and are accordingly improper, even aside from the fact that Exactacator's counterclaim, by its own admission, is no longer being pursued in any event. Exactacator's Motion to Strike Paragraphs 105 to 111 of the FAC is accordingly GRANTED.
CONCLUSION
Based on the foregoing, Defendant Exactacator's Motion to Dismiss and to Strike (ECF No. 30) are GRANTED, in part. To the extent the Motion requests that Paragraphs 105 to 111 of the First Amended Complaint be stricken, it is GRANTED. Insofar as the Motion seeks dismissal of individual claims, it is GRANTED as to the Fourth Claim for Relief, which has not been opposed, but is otherwise DENIED. /// ///
The Court declines Plaintiffs' suggestion that the Motion be converted into a summary judgment motion pursuant to Rule 12(d).
The Motion to Dismiss brought on behalf of Defendants Jim and Barbara Nesbitt, Shelley Rogers, John Nakashima and Nakashima Golf, Inc. (ECF No. 40), which challenges the Eleventh Claim for Relief, for an accounting, is DENIED.
IT IS SO ORDERED. Dated: July 30, 2020
/s/_________
MORRISON C. ENGLAND, JR.
SENIOR UNITED STATES DISTRICT JUDGE