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denying Rule 12(b) motion to dismiss where plaintiff alleged a unity of interest and undercapitalization of the corporate entity
Summary of this case from Pyrotek, Inc. v. Motionmaster, Inc.Opinion
No. C-00-3225 JCS
January 16, 2001
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS COMPLAINT FOR FAILURE TO STATE CLAIMS PURSUANT TO FED. R. CIV. P. 12(b)(6)
Defendant's Motion To Dismiss Complaint For Failure To State Claims Pursuant To Fed.R.Civ.P. 12(b)(6) came on for hearing on December 22, 2000, at 9:30 a.m. For the reasons stated below, Defendant's Motion is GRANTED in part and DENIED in part.
I. INTRODUCTION
Plaintiff Frank Mieuli ("Mieuli") is a limited partner of the San Francisco Forty-Niners Limited ("the Partnership"), a California limited partnership. Mieuli is suing both the Partnership and Edward J. DeBartolo Jr. ("DeBartolo"), individually, based upon news reports that DeBartolo is transferring his interest in the San Francisco Forty-Niner's to his sister, Denise DeBartolo York, as part of a settlement between DeBartolo and York. Mieuli alleges that DeBartolo has breached both a letter agreement and the limited partnership agreement by failing to honor a tag-along provision in those agreements. Those provisions purportedly require that DeBartolo give Mieuli advance notice of his intent to sell his interest in the Forty-Niners and that Mieuli be given the opportunity to sell his interest in the Forty-Niners to the same buyer and on the same terms. Mieuli also brings claims on his own behalf and on behalf of the partnership alleging that DeBartolo has mismanaged partnership assets. Defendant DeBartolo moves to dismiss all of Plaintiff's claims pursuant to Fed.R.Civ.P. 12(b)(6).
II. BACKGROUND
The facts set forth in this section are based on the allegations in Plaintiff's First Amended Complaint, which are assumed to be true for the purposes of this motion. See During v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987). The Court also relies upon the following documents, which were explicitly referenced in Plaintiff's First Amended Complaint ("FAC"): 1) the March 15, 1977 Letter Agreement (referenced in FAC at 2, ¶ 5); 2) the March 15, 1977 Memorandum of Purchase and Sale (referenced in FAC at 2, ¶ 4); 3) the March 25, 1977 Limited Partnership Agreement (referenced in FAC at 3, ¶ 9). See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) ("documents whose contents are alleged in the complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered on a Rule 12(b)(6) motion"). In considering the Partnership Agreement, the Court assumes, without deciding, that the First Amendment to Limited Partnership Agreement may be considered on this motion as part of the Partnership Agreement. The Court does not consider the newspaper articles attached to Defendant's motion to be part of Plaintiff's complaint. The Court may consider newspaper articles referenced in and integral to the complaint. Krim v. Coastal Physician Group, Inc., 81 F. Supp.2d 621, 625 n. 2 (M.D.N.C. 1998), aff'd, 201 F.3d 436 (4th Cir. 1999). Here, however, Plaintiff's only reference to news reports is the allegation that "[a]ccording to published reports, on or about March 18, 2000, DeBartolo contracted for the sale of his interest in the partnership." FAC at 5, ¶ 15 This general reference to "news reports" does not provide a sufficient basis for incorporating the entire content of these unspecified news reports into Plaintiff's complaint.
On March 15, 1977, DeBartolo and the former owners of the San Francisco Forty-Niners signed a Memorandum of Purchase and Sale ("Memorandum") under which DeBartolo, "or a California Corporation to be formed of which DeBartolo shall be sole shareholder," agreed to purchase 90% of the assets of the Forty-Niners. Plaintiff and the Morabito family trusts each agreed to transfer and contribute their 5% interest in the team to a limited partnership be formed by DeBartolo to operate the team. First Amended Complaint ("FAC") at 2-3, ¶¶ 4, 8; see also Memorandum at 1, ¶ 2, Exh. A to Declaration of Peter Obstler in Support of Defendant Edward DeBartolo, Jr.'s Motion to Dismiss Complaint for Failure to State Claims Pursuant to Fed.R.Civ.P. 12(b)(6) ("Obstler Decl.").
On the same day, DeBartolo and Mieuli signed a letter agreement setting forth the terms of their agreement "in connection with the limited partnership to be formed for the purposes of purchasing and operating the San Francisco 49ers football team." FAC at 2, ¶ 5; see also March 15, 1977 Letter Agreement ("the Letter Agreement"), Exh. B to Obstler Decl. The Letter Agreement gave Mieuli "tag-along" rights in the event that DeBartolo decided to sell his interest in the limited partnership. Specifically, the Letter Agreement contained the following provisions:
7. DeBartolo shall give Mieuli formal written notice of his intent to sell his partnership interest in San Francisco 49ers, Limited. . . .
8. If DeBartolo, at any time, sells all of his interest in the San Francisco 49ers, Limited, Mieuli may, but need not, sell all of his interest in the San Francisco 49ers, Limited to the same purchaser and on the same terms and conditions.
Id. at 4. The Letter Agreement also provided that all of the provisions in the Agreement would be binding on "the heirs, personal representatives, successors and assigns of DeBartolo and Mieuli, including, but not limited to, any corporation that acquires any interest in San Francisco 49ers, Limited." Id. at 5.
At approximately the same time that DeBartolo signed the Letter Agreement, he formed a corporation, San Francisco Forty-Niners, Inc. ("S.F., Inc.") and transferred his entire ownership interest in the team to S.F., Inc. FAC at 2-3, ¶ 7. S.F., Inc. rather than DeBartolo was named as the general partner in the limited partnership agreement ("the Partnership Agreement") creating San Francisco Forty Niners, Limited (the "Partnership"), signed March 25, 1977. See San Francisco Forty Niners, Limited: Limited Partnership Agreement, Exh. D to Obstler Decl. DeBartolo signed the Partnership Agreement on behalf of S.F. Inc. Id. The Partnership Agreement was also signed by Marshall Leahy, managing partner of the Morabito family trusts. Id. Under the Partnership Agreement, S.F. Inc., Franklin Mieuli and the Morabitos contributed their respective ownership interests in the team to the Partnership. In exchange, S.F., Inc. was to have a 90% interest in the Partnership as the general partner. Plaintiff and the Morabitos were to retain a 5% interest each as limited partners. Altamonte, Inc., not DeBartolo, executed the First Amendment to Limited Partnership Agreement on July 1, 1992, as shareholder of S.F., Inc. First Amendment to Limited Partnership Agreement, Exh. D to Obstler Decl.
According to DeBartolo, Altamonte Inc. is wholly owned by Edward J. DeBartolo Corporation, a parent entity jointly owned by Mr. DeBartolo and his sister, Denise DeBartolo York. Motion at 6, n. 3. For the purposes of this motion, the Court does not consider this factual assertion, which is outside the scope of Plaintiff's pleadings.
Plaintiff learned from news reports published around March 18, 2000 that DeBartolo had contracted for the sale of his interest in the Partnership. FAC at 5.
News reports provided by DeBartolo as exhibits to this motion indicate that the news reports referred to by Plaintiff probably concerned the settlement between Edward J. DeBartolo, Jr. and his sister, Denise DeBartolo York. See Exh. D. to Obstler Decl. According to the reports, DeBartolo and York agreed to divide the assets of Edward J. DeBartolo Corporation, with York controlling the San Francisco Forty-Niners and DeBartolo controlling the remaining assets of the corporation. Id. Again, the Court does not consider the contents of these news reports as they are not contained in the pleadings.
Plaintiff filed a complaint against DeBartolo and the Partnership on May 19, 2000. See Exh. A to Notice of Removal. DeBartolo removed to the Federal District Court for the Northern District of California on September 6, 2000 and filed a motion to dismiss on October 10, 2000. In that motion, Defendant DeBartolo asserted that he was not the proper defendant with respect to any of Plaintiff's claims and therefore, that the complaint should be dismissed. Rather than responding to Defendant's motion, Plaintiff filed a first amended complaint on October 30. Defendant took its original motion off calendar and filed a Motion to Dismiss Plaintiff's First Amended Complaint For Failure to State Claims Pursuant to Fed.R.Civ.P. 12(b)(6) (the "Motion") on November 17.
In his First Amended Complaint ("FAC"), Plaintiff alleged the following claims:
Claim One: Breach of Letter Agreement; Claim Two: Breach of Limited Partnership Agreement Claim Three: Breach of Fiduciary Duty Claim Four: Derivative Claim for Breach of Fiduciary Duty Claim Five: Derivative Claim for Conversion of Partnership Assets Claim Six: Derivative Claim for an Accounting Claim Seven: Derivative Claim for Unjust Enrichment Claim Eight: Violation of Business and Professions Code Section 17200
Plaintiff's first two claims are based upon DeBartolo's alleged failure to give Plaintiff notice of his intent to sell his interest in the Partnership and to afford Plaintiff the opportunity to sell his own interest on the same terms, which Plaintiff says DeBartolo was required to do under both the Letter Agreement and the Partnership Agreement. FAC at 5-6. Plaintiff's third claim is based upon the allegation that "[a]s de facto general partner, DeBartolo owed a fiduciary duty to plaintiff, a limited partner" and that DeBartolo breached that duty "by converting the Partnership's funds and by engaging in other acts of mismanagement and self-dealing." FAC at 6. Claims Four through Seven are derivative claims asserted on behalf of the Partnership based upon DeBartolo's alleged conversion, mismanagement and self-dealing while acting as "de facto general partner." FAC at 8-10. Finally, Claim Eight, for unfair business practices under § 17200 of the California Business and Professions Code, is based upon the same conduct alleged in Claims One through Seven. FAC at 10.
Defendant makes the following arguments in his Motion:
1. Claim One:
a. DeBartolo did not breach the tag-along provision in the Letter Agreement because that provision applied only to sale by DeBartolo of his individual interest in the limited partnership and DeBartolo never had such an individual interest.
b. Under the doctrine of novation, the obligations set forth in the Letter Agreement were completely subsumed by the Partnership Agreement and the Partnership Agreement makes clear that tag-along rights apply only to the general partner and not to DeBartolo as an individual.
2. Claims Two, Three, Four and Six: All of these claims are based upon duties owed by the general partner rather than DeBartolo individually. Moreover, there is no justification for imposing alter ego liability because Plaintiff has not shown that there is a unity of interest between S.F., Inc. and DeBartolo and Plaintiff has not shown that inequitable results will follow if corporate separateness is respected.
3. Claims Four through Seven:
a. These claims are barred because the Uniform Limited Partnership Act, Cal. Corp. Code § 15501 et seq., bars limited partners from asserting derivative claims on behalf of the partnership.
b. Plaintiff has not pleaded adequate facts to satisfy the requirement under Fed.R.Civ.P. 23.1 that plaintiffs bringing derivative claims must "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and . . . the reasons for the plaintiff's failure to obtain the action or for not making the effort."
4. Claim Eight: Plaintiff's claim under § 17200 of the Business and Professions Code must be dismissed because the underlying claims upon which it is based are defective. Plaintiff makes the following arguments in his opposition to Defendant's motion:
1. Claim One:
a. Plaintiff has pleaded in the complaint that DeBartolo transferred his interest in the partnership, albeit indirectly, and this allegation must be taken as true on a motion to dismiss. Moreover, because every contract is read to include an implied covenant of good faith and fair dealing, Defendant cannot use the "artifice" of corporate ownership to thwart Plaintiff's legitimate contractual expectations.
b. The doctrine of novation does not apply because it does not clearly appear from the Letter Agreement or the Partnership Agreement that the parties intended to extinguish the original agreement. In fact, the Partnership Agreement was intended to supplement the Letter Agreement.
c. The integration clause does not show that the Letter Agreement was superseded by the Partnership Agreement.
2. Claim Two: As the de facto general partner, DeBartolo can also be sued under the Partnership Agreement for breach of the tag-along provision in that agreement.
3. Claim Three, Four and Six:
a. These claims are valid because DeBartolo was the de facto general partner of the limited partnership and therefore owed fiduciary duties, including the duty to make an accounting, to the Partnership and to Mieuli, even if DeBartolo was not a party to the Partnership Agreement. On this theory, DeBartolo is directly liable on these claims.
b. DeBartolo is liable on these claims under an alter-ego theory, which Plaintiff has adequately alleged.
4. Claims Four-Seven:
a. Cal. Corp. Code § 15526 does not prohibit derivative suits by limited partners.
b. Plaintiff has adequately alleged futility by alleging that the Partnership repeatedly informed Plaintiff that it was not willing to participate in this litigation.
5. Claim Eight: Plaintiff's claim under § 17200 of the Business and Professions Code should not be dismissed because the underlying claims are sufficiently pleaded.
III. ANALYSIS A. Legal Standard
A complaint should not be dismissed for failure to state a claim under Fed.R.Civ.P. 12(b)(6) "unless it appears beyond doubt that a plaintiff could prove no set of facts in support of his claim which would entitle him to relief." During v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987) (quoting Conley v. Gibson, 355 U.S. 41 (1957). In ruling on a motion to dismiss, all allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. Id.B. Claim One 1. Breach of the Letter Agreement
Defendant asserts that under the express terms of the Letter Agreement, Plaintiff's tag-along rights applied to DeBartolo's individual interest in the yet-to-be formed partnership, the San Francisco Forty-Niners, Limited. Because DeBartolo never held an individual interest in the Partnership (as is evident from the Partnership Agreement) he has not violated the Letter Agreement. Plaintiff, on the other hand, asserts that he has adequately pled a breach of contract claim, and that Defendant's argument is based upon factual representations that contradict the allegations of the complaint and therefore, should not be considered on a motion to dismiss. In support of this argument, Plaintiff asserts that the complaint alleged that the Letter Agreement covered "both direct and indirect sales" of DeBartolo's interest. Opposition at 9. Plaintiff points to the following allegation in the FAC in support of this argument:
The parties' purpose in including similar language in both the Letter Agreement and the Limited Partnership Agreement was to ensure that if DeBartolo ever directly or indirectly transferred his interest in the Team or the Partnership for value, plaintiff would be able to transfer his interest on the same terms. Thus, they intended that these rights would be triggered by DeBartolo's sale of his interest in the Corporation, the Corporation's sale of its interest in the Partnership, or any other mechanism by which DeBartolo parted with his interest in the Partnership or the Team and received value in return.
FAC at 3-4, ¶ 10. Plaintiff further asserts that regardless of whether the Letter Agreement explicitly covered indirect as well as direct sales of DeBartolo's partnership interest, the implied covenant of good faith and fair dealing that is read into every contract was breached by DeBartolo's alleged acts.
The Court should dismiss Plaintiff's breach of contract claim based upon the Letter Agreement only if Plaintiff can prove no set of facts which would demonstrate that its interpretation of the Letter Agreement is correct. See Quigley v. Pennsylvania Higher Education Assistance Agency, 2000 WL 1721069 at *5 (N.D.Cal. 2000) (denying motion to dismiss breach of contract claim where contract was reasonably susceptible to both plaintiff's and defendant's interpretation of the contract) (citing Barnett v. Centoni, 31 F.3d 813, 816 (9th Cir. 1994)). Interpretation of a written instrument is "solely a judicial function unless the determination turns upon the credibility of extrinsic evidence." Powers v. Dickson, Carlson Campillo, 54 Cal.App.4th 1102, 1111 (Cal.Ct.App. 1997). Courts interpret the "intent and scope of the agreement by focusing on the usual and ordinary meaning of the language used and the circumstances under which the agreement was made." Id. Where the written instrument is unambiguous, parol evidence to show intent cannot be admitted. Id. On the other hand, parol evidence may be admitted to explain the meaning of a writing when the meaning urged is one to which the written contract term is reasonably susceptible or when the contract is ambiguous." Id. Applying these rules, courts have granted motions to dismiss on contract claims where it is clear from the unambiguous terms of the contract that the alleged conduct by the defendant does not constitute a breach of contract. See, e.g., International Ins. Co. v. Red White Co., 1994 WL 706361 at *13 (N.D.Cal.) (dismissing counterclaim for breach of contract where contract was unambiguous under California law); Campbell v. Allstate Ins. Co., 1998 WL 657488 at *1 (C.D.Cal.) (dismissing breach of contract claim on basis that the defendant's acts were consistent with the plain language of the contract and therefore did not breach the contract). On the other hand, where the contract is ambiguous and there is a question of fact concerning the parties' intent, dismissal of a breach of contract claim pursuant to Rule 12(b)(6) is inappropriate. See, e.g., Quigley, 2000 WL 1721069 (N.D.Cal. 2000).
Here, Defendant DeBartolo asserts that the tag-along provision in the Letter Agreement unambiguously applies only to DeBartolo's sale of "his partnership interest" in the soon-to-be formed partnership, and that because DeBartolo never had a partnership interest in the San Francisco 49er Limited (because he transferred his interest to S.F., Inc. before the Partnership was formed), he cannot be sued for breach of the Letter Agreement. Motion at 10. Plaintiff, on the other hand, asserts that the Letter Agreement was intended to cover "indirect as well as direct ownership." Opposition at 8-9.
While Defendant may or may not prevail on this point at trial or on summary judgment, the Court cannot say on this motion that, as a matter of law, the Letter Agreement does not cover transfer of an indirect interest by DeBartolo. Rather, because the Letter Agreement does not explicitly address whether the word "interest" was intended to include an indirect interest, there is an ambiguity which cannot be resolved at this point in the proceedings. See Oregon RSA No. 6, Inc. v. Castle Rock Cellular of Oregon Limited Partnership, 840 F. Supp. 770 (D.Or. 1993), aff'd 76 F.3d 1003 (9th Cir. 1996) (holding that where explicit terms of contract only provided for tag-along rights as to sale or transfer of partnership interest, the contract did not unambiguously provide that there were no tag-along rights with respect to a transfer of ownership of the entity that owned the partnership interest).
In his Reply brief, Defendant makes the further argument that even assuming Plaintiff's interpretation of the Letter Agreement is correct, Defendant has not breached the Letter Agreement. Reply at 5. Specifically, Defendant points to the fact that "[t]he Partnership Agreement establishes that, at least as of 1992, Mr. DeBartolo had divested himself of any personal interest in the corporate General Partner, which was and is wholly owned by Altamonte, Inc." Id. Defendant goes on to note that on October 10, 1997, "Mr. DeBartolo severed all his ties as an officer or director with the General Partner or Altamonte, Inc." Id. With respect to the point that Altamonte had become the owner of S.F., Inc. by 1992, even assuming the Court can consider this fact, which is based on the First Amendment to Limited Partnership Agreement — a document that is not explicitly referenced in Plaintiff's complaint — this does not establish as a matter of law that DeBartolo could not have breached the Letter Agreement. There are no allegations in the complaint concerning the ownership of Altamonte, Inc. With respect to the assertion that Defendant severed his ties with Altamonte and S.F., Inc. in 1997, this alleged fact is based upon a news report that the Court may not consider on a motion to dismiss.
In addition, the Court cannot conclude that there was no breach of the Letter Agreement based solely on the pleadings because of the implied covenant of good faith and fair dealing that is read into the Letter Agreement. In arguing that Defendant has breached that duty, Plaintiff relies heavily upon the district court's decision in Oregon RSA No. 6, Inc. v. Castle Rock Cellular of Oregon Limited Partnership, 840 F. Supp. 770 (D.Or. 1993), aff'd 76 F.3d 1003 (9th Cir. 1996). There, the partnership agreement contained a right of first refusal which provided that:
Before the General Partner or any Limited Partner sells, transfers or assigns all or any part of its Partnership Interest to a non-affiliate of such Partner, it shall offer by giving written notice to the General Partner, that interest to all of the other Partners for the price at which and the terms under which such non-affiliate has offered in writing to pay for such interest.76 F.3d at 1007. Plaintiff, the general partner, alleged that the right of first refusal was violated when the grandparent company of one of the limited partners secretly agreed with the parent company of another of the limited partners to convey all of its interest in the entities that owned its partnership interest. Id. at 1005-1006. The defendant asserted that the right of first refusal did not apply because, on its face, the term in the partnership agreement did not cover sale of an entity that held a partnership interest but rather, was limited to sale of the partnership interest itself. 840 F. Supp. at 773. The district court disagreed, finding that the implied duty of good faith and fair dealing in the contract was breached because the transfer was an "artifice intended to thwart plaintiff's legitimate contractual expectation that it would have that it would have a right of first refusal" with respect to the transaction in that case. Id. at 775. In reaching this conclusion, the court relied in part on the undisputed fact that the corporate entities which owned the partnership interest were themselves shell corporations. Id. The Court rejected the defendants' argument that "the good faith doctrine cannot be used to contradict the express terms of the contract." Id. at 778. The Court noted that the good faith duty read into the contract merely filled a gap where the contract was silent, pointing out that the contract did not expressly permit the transaction in question but rather, failed to prohibit it explicitly. Id.
Defendant asserts that Oregon RSA is inapplicable because the court in that case was applying Oregon law rather than California law, and that California courts have "consistently rejected claims that acquisition of the parent of a partner to a partnership may constitute a transfer of an interest in the partnership sufficient to trigger first refusal provisions under the partnership agreement." Reply at 6. Defendant cites to United States Cellular Investment Company of Los Angeles v. Airtouch Cellular, 2000 WL 349002 (C.D.Cal.) in support of this position that California law differs from Oregon law. However, that case does not support Defendant's position.
In United States Cellular, the court considered a motion for a temporary restraining order and therefore was required to determine whether the plaintiff had demonstrated probable success on the merits. Id. The plaintiff asserted that the defendant had breached the right of first refusal contained in a partnership agreement when it transferred all rights to control the entity that owned its partnership interest to another entity. Id. The court rejected the plaintiff's argument, based upon the decision in Oregon RSA, that the defendant had breached the implied covenant of good faith and fair dealing that is read into contracts. Id. at *8. In reaching this conclusion, the court considered extrinsic evidence going to the parties' intent. The court noted that in Oregon RSA, the corporate entities whose ownership was transferred were shell corporations, whereas evidence presented by the defendant in United States Cellular showed that the corporate entities whose stock was transferred were not shell corporations. Id. The court also based its conclusion on the conduct of the plaintiff following execution of the partnership agreement, pointing out that there had been two previous transfers of control of the same entity and Plaintiff had not challenged either transfer, supporting the defendant's interpretation of the partnership agreement. Id. at *8. This consideration of extrinsic evidence distinguishes United States Cellular from the instant case, where the Court is bound to assume the truth of the allegations in the FAC. Moreover, the court in United States Cellular did not reject the underlying principle that a party may not, by artifice, circumvent the parties' legitimate contractual expectations.
While Oregon RSA and United States Cellular reach opposite conclusions with respect to whether the implied duty of good faith and fair dealing was breached, both cases indicate that where an agreement does not specifically state that the right of first refusal applies to transfers of stock ownership, the court must look to extrinsic evidence to determine what the intentions of the parties to the agreement were and whether the defendant were seeking to circumvent that agreement. See United States Cellular at *9; Oregon RSA, 840 F. Supp. at 776. Here, the Letter Agreement does not explicitly address whether the tag-along rights apply to transfers of control of the entity that owns a partnership interest. Because Plaintiff may be able to prove some set of facts that will support his interpretation of the Letter Agreement, Plaintiff has adequately pleaded his breach of contract claim based upon the Letter Agreement.
Defendant also relies on Richardson v. La Rancherita, 98 Cal.App.3d 73 (1979) in support of its argument that Claim One should be dismissed because there has been no breach of the Letter Agreement. There, the plaintiff and the defendant were parties to a real estate lease which required that La Rancherita consent to the assignment of the lease to another tenant. 98 Cal.App.3d at 79. When plaintiff attempted to assign the lease to a new tenant, La Rancherita refused to consent to the assignment, hoping to negotiate a lease with the new tenant on terms more favorable to La Rancherita. Id. In order to get around the consent requirement, plaintiff's shareholders arranged to sell their corporate stock to the new tenant. Id. La Rancherita threatened a forfeiture of the lease in response, and plaintiff sought a declaratory judgment that the sale of their stocks did not violate the contract. Id. at 78. The court granted summary judgment in favor of the plaintiff, finding on the basis of the language in the contract alone that transfer of stock ownership was not a breach of the contract. Id. at 79. The court noted that La Rancherita had submitted declarations stating that plaintiff's actions amounted to "financial blackmail . . . to vitiate the terms of the lease" but that these declarations had "contribute[d] more fuel than facts to the conflict." Id. It also made clear that although it had relied on the terms of the lease alone, "many factual issues pertaining to the meaning of the subject lease provision could have been raised." Id. It was only because the parties did not raise these factual questions that the court did not address them. Id. Given the court's recognition in Richardson that extrinsic evidence might have been presented on the issue of intent, that case does not support Defendant's position that Plaintiff's breach of contract claim based on the Letter Agreement should be dismissed at this stage of the case.
2. Novation
Defendant asserts as an additional ground for dismissing Claim One that Plaintiff cannot allege a breach of contract claim based on the Letter Agreement because the Partnership Agreement extinguished the obligations set forth in the Letter Agreement under the doctrine of novation. Motion at 11. "Novation is the substitution of a new obligation for an existing one." Wells Fargo Bank N.A. v. Bank of America NTSA, 32 Cal.App.4th 424, 431 (1995). The substitution is by agreement and with the intent of extinguishing the prior obligation. Id. "The substitution of a new obligation for an existing one may be either (1) a new obligation between the same parties, or 2) a new obligation arising because of new parties, either a new debtor or a new creditor." Id. In order for the doctrine of novation to apply, "it must clearly appear that the parties intended to extinguish rather than merely modify the original agreement." Id. The intent to release a party from an obligation under the contract may be expressed in advance, in the underlying contract. Id. For instance, in Wells Fargo, a novation was found where the defendant purchased a lease from a third party. Id. at 432. The court found the requisite intent on the part of the plaintiffs to extinguish the obligations of the third party based on the terms of the original lease, which stated that the lessee "shall be relieved of all liability accruing under this lease from and after the date of any assignment." Id.
Here, Defendant argues that the anticipatory language of the Letter Agreement indicates the intent of the parties that the Partnership Agreement extinguish the obligations under the Letter Agreement. In particular, Defendant points to the reference in the Letter Agreement to the "limited partnership to be formed." Motion at 11. Defendant also relies on the Partnership Agreement, which provides for tag-along rights with respect to the General Partner, arguing that this term reflects the intent of the parties to substitute the tag-along rights provision of the Partnership Agreement for the provision in the Letter Agreement. Motion at 12. Finally, Defendant points to the integration clause in the Partnership Agreement, which he says reflects the parties' intent to extinguish the obligations under the Letter Agreement.
Defendant's argument on novation is unconvincing because the "anticipatory language" in the Letter Agreement does not reflect a clear intent to extinguish the obligation of the Letter Agreement. The Letter Agreement provides that "[a]ll of the provisions in this agreement shall be binding on the heirs, personal representatives, successors and assigns of DeBartolo" but does not include the additional language of the lease in Wells Fargo, namely that DeBartolo will be relieved of his obligations under the Letter Agreement upon transfer or assignment of his interest. Nor does the integration clause provide unambiguous evidence of the intent of DeBartolo and Mieuli, as that clause by its terms appears only to apply to the parties to the Partnership Agreement, and DeBartolo as an individual is not a named party to that agreement. See § 25 to Partnership Agreement.
C. Claims Two, Three, Four and Six
Defendant asserts that Claims Two, Three, Four and Six should be dismissed because all of the duties on which these claims are based arise from the Partnership Agreement, and Defendant is not a party to that agreement. Motion at 13. Plaintiff responds that Defendant may be liable on the basis that the general partner, S.F., Inc. acted as DeBartolo's alter ego. In addition, with respect to Claims Three, Four and Six, Plaintiff asserts that DeBartolo can be held directly liable as the "de facto" general partner of the Partnership.
1. Alter Ego Liability
In order to determine alter ego liability, California courts require: "1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and 2) that if the acts are treated as those of the corporation alone, and inequitable result will follow." Associated Vendors, Inc. v. Oakland Meat Co., Inc., 210 Cal.App.2d 825, 837 (1962). The doctrine is designed to prevent fraud or injustice, and thus, "bad faith in one form or another is an underlying consideration." Id. The question of whether or not to pierce the corporate veil is a "peculiarly factual issue." Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1269, 1284 (1994). The Court may consider a wide variety of factors, including whether there has been commingling of funds, whether the individual treated assets of the corporation as his own and whether the corporation was adequately capitalized. Associated Vendors, 210 Cal.App.2d at 837.
At the pleading stage, conclusory allegations that a corporate entity is the alter ego of the defendant are insufficient to survive a motion to dismiss. See, e.g., Hockey v. Medhekar, 30 F. Supp.2d 1209, 1211 n. 1 (N.D.Cal. 1998) (dismissing securities fraud claim against individual defendants on basis that allegation that corporations were alter egos for those defendants was insufficient to state a claim); Hokama v. E.F. Hutton Company, Inc., 566 F. Supp. 636, 647 (C.D.Cal. 1983) (holding that plaintiff had failed to state a claim against individual defendant where complaint contained only conclusory allegation of alter ego status without alleging the elements of the doctrine).
Here, in contrast to the cases cited by Defendant, Plaintiff has included allegations which go beyond "conclusory allegations" in support of its alter ego theory. See FAC at ¶ 8, 11-14, 33-34. Although Defendant characterizes Plaintiff's allegation as mere "boilerplate recitation of the various unity factors," most of the cases on which Defendant relies in support of this argument do not involve motions to dismiss under Rule 12(b)(6), where no evidence outside of the complaint may be considered. See, e.g., Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1269, 1285 (1994) (reversing award of punitive damages against defendant because plaintiff failed to establish "financial condition" of defendant at trial and rejecting argument on appeal that punitive damages could be supported on the basis of parent company's financial condition because there was no evidence in the record showing unity of interest and inequitable result justifying reliance on alter ego theory); In re Christian and Porter Aluminum Co. v. Titus, 584 F.2d 326, 337 (9th Cir. 1978) (rejecting findings of bankruptcy judge on alter ego status of defendant because there was no evidence in the record showing unity of interest); Calvert v. Huckins, 875 F. Supp. 674, 678 (E.D. Ca. 1995) (granting motion to dismiss for lack of personal jurisdiction because plaintiff's had failed to present sufficient evidence in support of alter ego theory to make a prima facie case of alter ego jurisdiction).
In contrast, the court's decision in Federal Reserve Bank of San Francisco v. HK Systems, 1997 WL 227995 (N.D.Cal.) — which does involve a Rule 12(b)(6) motion to dismiss — supports Plaintiff's position that the allegations in the complaint here are sufficient to state a claim based on alter ego liability. In HK Systems, the court denied a motion to dismiss for failure to plead adequately alter ego status where the plaintiff alleged that the defendant parent corporation "dominated and controlled" the subsidiary "to such an extent that the individuality and separateness of the subsidiary had ceased," that the parent disregarded the corporate form of the subsidiary" and that subsidiary was so inadequately capitalized that its capitalization was "illusory." Id. at *5. Similarly, here, Plaintiff has alleged unity of interest, FAC at 7, ¶ 33 and undercapitalization of the corporate entity, which is sufficient to survive a motion to dismiss on an alter ego theory.
2. Direct Liability as De Facto Partner
Plaintiff argues further in his Opposition that DeBartolo may be held directly liable for his breach of fiduciary duty (Claims Three, Four and Six) because under California law, "a fiduciary relation arises whenever confidence is reposed on one side, and domination and influence result on the other." Opposition at 14 (quoting In re Abrams, 229 B.R. 784, 791 (B.A.P. 9th 1999)). In Abrams, the court held that the general partner of the general partner of a limited partnership was a fiduciary of the limited partnership because of the high degree of control the defendant exercised over the project at issue in that case. Id. at 792. Plaintiff points to his allegations in the complaint that he dominated S.F., Inc and acted as the de facto general partner in support of his position that Plaintiff has adequately pleaded Claims Three, Four and Six.
It is not clear to the Court whether all of the elements of alter ego liability must be shown in this case to give rise to direct liability based upon de facto partnership. Without reaching this issue, however, the Court finds that Plaintiff's allegations of alter ego liability with respect to these claims are also sufficient to support these claims on a theory of de facto partnership.
D. Derivative Claims By Limited Partner
Defendant asserts that under Cal. Corp. Code § 15526, a limited partner may not bring a derivative claim on behalf of the partnership. Motion at 19-20. This provision provides that "[a] contributor, unless he is a general partner, is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner's right against or liability to the partnership." Cal. Corp. Code § 15526. While not the clearest statutory provision, the Court concludes that this section does not bar derivative claims — rather, it was intended to prevent limited partners from interfering with suits brought by or against the partnership.
Defendant cites two cases in which the court states that under § 15526, a limited partner may not bring a lawsuit on behalf of a limited partnership. See Kobernick v. Shaw, 70 Cal.App.3d 914, 918 (1977); Bedolla v. Logan Frazer, 52 Cal.App.3d 118, 128 (1975). However, in both of those cases, the court found that the rule did not apply. Moreover, in Wallner v. Parry Professional Building, 22 Cal.App.4th 1446, 1450-1453 (1994), the court rejected the argument advanced by Defendant that Kobernick and Bedolla stand for the proposition that a limited partner may not bring a derivative claim on behalf of the partnership. Rather, the court held that the basic purpose of § 15526 is served by allowing limited partners to bring a derivative claim against the partnership. Id. at 1453.
In Wallner, the limited partner sued the general partners for breach of fiduciary duty on the basis that the general partners had leased partnership property to themselves and failed to pay rent. Id. at 1448. The trial court dismissed the claim under § 15526 and the court of appeal reversed. The court of appeal reasoned that the purpose of § 15526 is to prevent the limited partners from interfering with the right of the general partners to carry on the business of the partnership. Id. 1453. Because the basis for the lawsuit was that the general partners had declined to carry on the business of the partnership, the derivative action claims brought by the limited partner did not interfere with that right. Id. Similarly, in this action Plaintiff is alleging claims on behalf of the Partnership based on DeBartolo's failure to conduct the business of the partnership in a satisfactory manner. Under Wallner, Mieuli is not barred by § 15526 from bring derivative claims on behalf of the Partnership.
E. Demand Requirement
Defendant asserts that Plaintiff's derivative claims should be dismissed because they do not satisfy the demand requirement under Fed.R.Civ.P. 23.1. That rule provides that where a shareholder brings a derivative claim:
The complaint shall . . . allege with particularity the efforts, if an, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority . . . and the reasons for the plaintiff's failure to obtain the action or for not making the effort.
Fed.R.Civ.P. 23.1. While Rule 23.1 governs pleading requirements for derivative claims, state substantive law is generally the source of the demand requirement for derivative claims in diversity actions. Kamen v. Kemper, 500 U.S. 90, 97 (1991). Therefore, in determining the adequacy of the pleadings, state law governing demand and futility should be applied. Country National Bank v. Mayer, 788 F. Supp. 1136, 1140 (E.D.Cal. 1992). Because the general partner, S.F. Inc., is a California Corporation, California law should be applied in determining the adequacy of the pleadings on demand and futility.
Under California law, a derivative action generally must be brought by the board of directors. Id. at 1144. The decision of whether the board shall bring a derivative action falls under the business judgment rule. Id. Under this rule, a director is not liable for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation. Id. Further, courts presume that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company. Lamden v. LaJolla Shores Clubdominium Homeowners Ass'n, 72 Cal.Rptr.2d 906, 915 (1998). Therefore, a plaintiff challenging the board's decision "has the burden of showing the decision involved a conflict of interest, or was made in bad faith (e.g. fraudulently) or without the requisite degree of care and diligence." Id. (citation omitted).
Where a shareholder has made a formal demand and the company has refused to act on that demand, a shareholder, in order to survive a motion to dismiss under Rule 23.1, must allege both that a demand was made and particular facts that create a reasonable doubt that the board's refusal was in fact made on in informed basis, in good faith, and with the corporation's best interests in mind. See Stepak v. Addison, 20 F.3d 398, 403 (11th Cir. 1994); Findley v. Garrett, 109 Cal.App.2d 166, 177-78 (1952); Levine v. Smith, 591 A.2d 194, 211 (Del. 1992). Conclusory allegations that the board's refusal to act was wrongful are insufficient to satisfy the requirements of Rule 23.1. Stepak, 20 F.3d at 403.
Alternatively, the requirements of Rule 23.1 may be satisfied where a shareholder alleges specific facts showing that it would have been futile to make a demand on the corporation. Country National Bank v. Mayer, 788 F. Supp. 1136, 1144 (E.D.Cal. 1992). Conclusory allegations of fraud, conspiracy or bad faith on the part of the directors is insufficient to satisfy the futility requirement. Id. at n. 16. On the other hand, an allegation that the president of the board dominated the board and that his interests were adverse to that of the plaintiff have been found to suffice. Id. A plaintiff may also satisfy the demand requirement by alleging facts showing that a majority of the board were not disinterested and therefore, demand would have been futile. Id at 1145-1146.
Here, Plaintiff asserts in his Opposition that he has alleged specific facts showing that demand would have been futile. Opposition at 17-18. Plaintiff points to the allegation in his FAC that "[t]he Corporation has repeatedly informed plaintiff that it is not willing to participate in this litigation. Demand upon the Corporation to do so would therefore be futile." FAC at 8, ¶ 38. Plaintiff also argues that the current general partner of the limited partnership is the "only authority competent to file suit on behalf of the Partnership." Opposition at 18. Therefore, Plaintiff asserts, "a clearer case of futility would be difficult to imagine." However, Plaintiff has failed to plead specific facts which show that the general partner, or at least a majority of the board of directors of the general partner, are not disinterested. See In re Silicon Graphics Inc. Securities Litigation, 183 F.2d at 990. Therefore, Plaintiff has not adequately pleaded futility.
Nor does the case cited by Plaintiff, Nussbacher v. Continental Nat'l Bank and Trust Co. of Chicago, 518 F.2d 873, 877 (7th Cir. 1975) provide support for Plaintiff's position. There, the court of appeals found that plaintiff's allegation of futility was adequate where plaintiff alleged that after she commenced an identical action in another jurisdiction, the board of directors had met to discuss whether they would join in the litigation and decided that it would be contrary to the interests of the corporation to participate. Id. at 875. She also alleged that a majority of the board members participated in the illegal acts alleged. Id. Finally, the chairman of the board had submitted an affidavit to the district court stating that if the plaintiff had proposed that the corporation commence the action at issue, the board would not have done so, and further stating that he had conferred with the other members of the board and that they were in agreement with him." Id. at 876. Here, no such particular allegations have been made and there is no indication as to whether or not the board of directors of the general partner ever considered whether or not to participate in this action.
The Court finds that Plaintiff has failed to comply with the requirements of Rule 23.1 with respect to Claims Four through Seven. These claims are therefore dismissed with leave to amend to plead specific facts showing that either: 1) a formal demand was made upon the board of directors of the general partner and the board wrongfully rejected that demand; or 2) it would have been futile to make a demand upon the board of directors.
Although Plaintiff's FAC and Opposition indicate that Plaintiff was seeking to comply with Rule 23.1 by pleading futility, at oral argument, Plaintiff appeared to take the position that Plaintiff had, in fact, made a formal demand upon the board of directors and that the demand had been rejected.
F. California Business and Professions Code § 17200
Defendant asserts that Plaintiff's § 17200 claim is predicated upon his other claims and that because Plaintiff has failed to state any valid claims, his § 17200 claim must be dismissed as well. To the extent that Plaintiff has stated other valid claims, as indicated above, his § 17200 claim also will not be dismissed on this motion.IV. CONCLUSION
Defendant's Motion To Dismiss is therefore DENIED with respect to Claims One, Two, Three and Eight. Defendant's Motion is GRANTED with respect to Claims Four through Seven, with leave to amend within thirty (30) days to plead with particularity that the demand requirement of Fed.R.Civ.P. 23.1 has been met.
IT IS SO ORDERED.