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RSMCFH, LLC v. Fareharbor Holdings, Inc.

United States District Court, D. Hawaii

August 30, 2019

RSMCFH, LLC, a Hawaii limited liability company, Plaintiff,
v.
FAREHARBOR HOLDINGS, INC., a Delaware corporation, Defendant.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS RSMCFH, LLC’S FRAUD CLAIMS PURSUANT TO RULE 12(B)(6)

          Leslie E. Kobayashi United States District Judge.

         Before the Court is Defendant FareHarbor Holdings, Inc.’s (“Defendant”) Motion to Dismiss RSMCFH, LLC’s Fraud Claims Pursuant to Rule 12(b)(6) (“Motion”), filed on April 9, 2019. [Dkt. no. 43.] Plaintiff RSMCFH, LLC (“Plaintiff”) filed its memorandum in opposition on May 24, 2019, and Defendant filed its reply on May 31, 2019. [Dkt. nos. 50, 52.] This matter came on for hearing on June 14, 2019. Defendant filed its supplemental memorandum in support of preemption (“Preemption Memorandum”) on July 1, 2019, and Plaintiff filed its supplemental memorandum in opposition (“Preemption Opposition”) on July 15, 2019. [Dkt. nos. 62, 65.] For the reasons set forth below, Defendant’s Motion is hereby granted in part, insofar as Counts I, II, and IV are dismissed, and the Motion is denied in part, insofar as the dismissal is without prejudice.

         BACKGROUND

         The relevant factual background of this case is set forth in this Court’s Order Granting in Part and Denying in Part Defendant’s Motion to Dismiss Pursuant to Rule 12(b)(6), [filed 2/13/19 (dkt. no. 30) (“2/13/19 Order”),[1]] and will not be repeated here. The 2/13/19 Order denied Defendant’s First Motion to Dismiss as to Plaintiff’s breach of contract claim (“Count III”) and dismissed the following claims without prejudice: violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (“Count I”); fraud (“Count II”); and violation of the Hawai`i Uniform Securities Act, Haw. Rev. Stat. §§ 485A-501 and 485A-509 (“Count IV”).[2] 2/13/19 Order, 361 F. Supp. 3d at 986, 992. The Fraud Claims were dismissed because: 1) Count I and IV failed to meet the heightened pleading standards for scienter under the Private Securities Litigation Reform Act of 1995 (“PSLRA”); id. at 988-89, 991-92; and 2) all of the Fraud Claims failed to meet the Fed. R. Civ. P. 9(b) heightened pleading standard, id. at 990-92.

         Plaintiff’s First Amended Civil Complaint for Damages (“Amended Complaint”), [filed March 12, 2019 (dkt. no. 31),] alleges the same four claims as its original Complaint. The most relevant new factual allegations in the Amended Complaint are summarized below.

         In September 2016, Defendant obtained $2.5 million in capital from Costella Kirsch (“Costella”), a venture capital firm, in exchange for warrants on Defendant’s “most senior preferred security equal to 3.5% of the Company’s outstanding shares, [i.e., the Series B Preferred Shares,] which percentage was not subject to dilution” (“Costella Warrants”). [Amended Complaint at ¶¶ 17, 34.] Plaintiff unaware of the Costella Warrants until April 2018. [Id. at ¶ 17.]

         Around December 27, 2016, Defendant sent a draft Subscription Agreement to Plaintiff, but no provision in the draft agreement guaranteed the accuracy of the information Defendant had provided Plaintiff. Plaintiff insisted that Defendant add such a provision. [Id. at ¶ 31.] Section 4(e) of the Subscription Agreement that the parties ultimately executed states Defendant

has made available to [Plaintiff] all information reasonably available to [Defendant] that [Plaintiff] has requested for deciding whether to acquire the Preferred Stock, which for avoidance of doubt, includes: (i) payroll summaries for [Defendant] for each of the four quarters of 2016, (ii) a copy of [Defendant’s] financial dashboard setting forth 2016 bookings, payments, fees, available balance and total customers, and (iii) [Defendant’s] balance sheet dates as of September 30, 2016 (collectively, the “Investor Information”). No representation or warranty of [Defendant] contained in this Agreement contains any untrue statement of a material fact or to [Defendant’s] knowledge, omits to state a material fact necessary in order to make the statement contained herein or therein not misleading in light of the circumstances under which they were made. Further, to [Defendant’s] knowledge, the Investor Information is true and correct in all material respects and fairly presents the financial condition and operating results of [Defendant] as of the dates, and for the periods indicated therein.

[Id. (emphasis in Amended Complaint).]

         During a January 4, 2017 telephone call, Roy Pfund and Chad Iwamoto asked George “Max” Valverde[3] to confirm the number of financings, if any, that Defendant had conducted and to describe the nature of the financings. [Id. at ¶ 25.] During the same phone call and in response to this inquiry, Mr. Valverde made three oral representations: 1) Defendant had preferred investors, consisting of friends and family, who contributed a total of $3 million to Defendant in a Series A round; 2) the $3 million investment was the only outside investment that Defendant had received as of that date; and 3) apart from the Series A investors, no one else held preferred securities issued by Defendant. [Id. at ¶ 26.]

         During a January 5, 2017 telephone call, Mr. Pfund and Mr. Valverde discussed the previously issued warrants on Defendant’s stock. Mr. Pfund asked whether the outstanding warrants had been issued to an outside investor and whether such warrants were on Defendant’s preferred stock. Mr. Valverde reiterated that Defendant had no other holders of preferred stock, and he stated that the outstanding warrants were issued to employees on Defendant’s common stock as incentive compensation. [Id. at ¶ 33.]

         On or around April 16, 2018, Zachary Hester[4] called Mr. Iwamoto and Mr. Pfund and notified them of Booking Holdings Inc.’s (“Booking”) imminent acquisition of Defendant (“Booking Acquisition”). [Id. at ¶ 48.] Shortly thereafter, Plaintiff received a letter from Defendant “contain[ing] a release of any and all claims that Plaintiff had against [Defendant] or its officers or directors relating to Plaintiff’s acquisition of [Defendant’s] Series B Preferred shares.” [Id.] The letter required Plaintiff to execute the release in order to receive any consideration for Plaintiff’s shares. Michael Schmitt, Defendant’s operations manager, told Mr. Pfund that Plaintiff’s execution of the release was required prior to the closure of the Booking Acquisition and prior to Plaintiff’s payment for its Series B Preferred shares. According to Plaintiff, its execution of a release was neither a condition precedent to the closing of the Booking Acquisition nor a condition of Plaintiff’s right to redeem its shares. [Id. at ¶ 48.]

         Plaintiff alleges the Investor Information Defendant provided to Plaintiff was false, in violation of § 4(e) of the final Subscription Agreement. [Id. at ¶ 44.] Plaintiff asserts it “is informed and believes” Defendant knew that, if Defendant had disclosed the Costella Warrants to Plaintiff, the information would have jeopardized Plaintiff’s investment in Defendant. According to Plaintiff, if it had known about the Costella Warrants, it would not have agreed to the terms in the Subscription Agreement and would have insisted upon the same, or better, terms as the Costella Warrants. [Id. at ¶ 47.]

         In the instant Motion, Defendant seeks dismissal of the Fraud Claims with prejudice. Defendant argues the Fraud Claims in the Amended Complaint are still insufficiently pled. In addition, Defendant argues Count II, Plaintiff’s common law fraud claim, should be dismissed with prejudice because it is preempted by federal securities law.

         DISCUSSION

         I. Consideration of Materials Beyond the Pleadings

         Defendant submits two exhibits in support of the Motion: a series of emails between Mr. Valverde, Mr. Pfund, Mr. Iwamoto, and the Hesters between December 19, 2016 and December 28, 2016; [Motion, Decl. of Laura A. Kelly in Supp. of Motion (“Kelly Decl.”), Exh. A;] and a different thread of emails between the same persons, and others, from December 19, 2016 to January 5, 2017, [id., Exh. B]. The standards applicable to the determination of whether to consider the exhibits in ruling on the Motion are set forth in the 2/13/19 Order and will not be repeated here. See 2/13/19 Order, 361 F. Supp. 3d at 986-87.

         Defendant argues the two sets of emails go to the core of Plaintiff’s Fraud Claims and therefore are incorporated by reference into Plaintiff’s Amended Complaint. Defendant’s argument is rejected because no email within either Exhibit A or Exhibit B is referred to in the Amended Complaint, nor is any of those emails the basis of Plaintiff’s claims. Instead, the emails are “the basis of the defense that Defendant disclosed [the relevant financial information] to Plaintiff before Plaintiff’s investment.” See id. at 987 (citing Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1002 (9th Cir. 2018)).[5] Exhibits A and B therefore are not incorporated by reference in the Amended Complaint and will not be considered in ruling on the Motion.

         II. ...


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