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Battalion Chief Grandchildren's Fund v. Lowden

United States District Court, D. Nevada

March 17, 2017

BATTALION CHIEF GRANDCHILDREN'S FUND, by and through its trustee ANGELINA GALLINDO on behalf of herself and nominal defendant SRC NIGHTCLUB & GRILL, LLC; RAVEN ENTERTAINMENT, LLC on behalf of itself and nominal defendant STONEY'S ENTERTAINMENT, INC.; and SEER CARTEL, LLC, Plaintiffs,
v.
CHRISTOPHER LOWDEN; and HAROLD GRAY a.k.a “STONEY, ” Defendants, and STONEY'S ENTERTAINMENT, INC.; and SRC NIGHTCLUB & GRILL, LLC, Nominal Defendants.

          ORDER

          Gloria M. Navarro, Chief Judge.

         Pending before the Court is a Motion to Dismiss (ECF No. 11) filed by Defendants Christopher Lowden (“Lowden”), Harold Gray (“Gray”), SRC Nightclub & Grill, LLC (“SRC”), and Stoney's Entertainment, Inc. (“SEI”) (collectively, “Defendants”). Plaintiffs Battalion Chief Grandchildren's Fund, by and through its trustee, Angelina Gallindo (“Gallindo”) on behalf of herself and nominal defendant SRC, Raven Entertainment, LLC (“Raven”) on behalf of itself and nominal defendant SEI, and Seer Cartel, LLC (“Seer Cartel”) (collectively, “Plaintiffs”) filed a Response (ECF No. 16), and Defendants filed a Reply (ECF No. 19).[1]

         I. BACKGROUND

         This case arises as a member and shareholder derivative action against officer-Defendants Lowden and Gray. (Compl. ¶ 1, ECF No. 1). Plaintiffs allege that Gray “organized Nominal Defendant SRC for the stated purpose of conducing a nightclub and bar business at the premises located at 9155 S. Las Vegas Blvd., Suite 300, Las Vegas, Nevada 89123 (‘Stoney's').” (Id. ¶ 15). Gray then allegedly “caused SRC to offer to the public 50 units of membership interest in SRC at the price of $50, 000 per unit.” (Id. ¶ 16). Gallindo bought one membership unit, and Raven acquired three units. (Id. ¶¶ 17-19). Plaintiffs allege that Defendants “raised over $2.5 million from private investors, ” which they predominantly used “to finance their extravagant lifestyle.” (Id. ¶ 20). Plaintiffs further allege that Defendants “misappropriated from SRC tens of thousands of dollars in cash that was collected by SRC as cover charges at Stoney's and that was not accounted for in company books or reported to the Internal Revenue Service . . . [and] SRC became insolvent.” (Id. ¶ 27-28).

         Plaintiffs then allege that Defendants “created another company, SEI, and in August 2012 offered the previous SRC's investors a membership-interest swap for SEI's shares” while also issuing “several [of] SEI's shares to new investors.” (Id. ¶ 29). Plaintiffs allege that any distributions to any investors were “financed from other investors' money, ” paid to “selectively picked investors, mostly their friends and families, ” and none of it was properly documented. (Id. ¶¶ 26, 33-35, 37). Raven “signed the equity-swap agreement, thus becoming a shareholder of SEI, ” while Gallindo “refused to sign . . . and subsequently lost her investment in SRC due to Stoney's closing its doors and SRC failing to renew its business license with the Nevada Secretary of State.” (Id. ¶¶ 31-32). Ultimately, SEI became insolvent and closed in 2013, and its “remaining assets [were sold] to SRC 1, LLC, d/b/a Las Vegas Bull.” (Id. ¶¶ 36, 38).

         Plaintiffs then allege similar facts regarding Defendants selling units for $50, 000 for Stoney's Evansville, “a nightclub and bar business in Evansville, Indiana.” (Id. ¶¶ 41-42). Plaintiff Seer Cartel bought one membership unit in Stoney's Evansville. (Id. ¶ 43). Plaintiffs assert similar allegations regarding Defendants' use of investor money for other purposes than Stoney's Evansville. (Id. ¶¶ 44-48).

         Plaintiffs state that they first learned of the alleged fraud on December 5, 2012. (Id. ¶ 49). Plaintiff's Complaint, filed on December 5, 2015, includes the following ten claims for relief: (1) RICO, 18 U.S.C. §§ 1961-1968-Civil RICO and NRS 207.470; (2) breach of fiduciary duties; (3) intentional misrepresentation (fraud); (4) unjust enrichment; (5) civil conspiracy; (6) accounting; (7) securities fraud, violations of Securities Act Section 17(a), 15 U.S.C. § 77q(a); (8) securities fraud, violations of Exchange Act Section 10(b), 15 U.S.C. § 78j(b); (9) securities fraud, violations of Exchange Act Rule 13b2-2, 17 C.F.R. § 240.13b2-2; and (10) securities fraud, violations of Exchange Act Rule 13(b)(2)(A) and 13(b)(2)(B).

         II. LEGAL STANDARD

         Dismissal is appropriate under Rule 12(b)(6) where a pleader fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A pleading must give fair notice of a legally cognizable claim and the grounds on which it rests, and although a court must take all factual allegations as true, legal conclusions couched as a factual allegations are insufficient. Twombly, 550 U.S. at 555. Accordingly, Rule 12(b)(6) “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id.

         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. This standard “asks for more than a sheer possibility that a defendant has acted unlawfully.” Id.

         “Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion . . . However, material which is properly submitted as part of the complaint may be considered on a motion to dismiss.” Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990) (citations omitted). Similarly, “documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss” without converting the motion to dismiss into a motion for summary judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), overruled on other grounds by Galbraith v. Cty. of Santa Clara, 307 F.3d 1119 (9th Cir. 2002). Under Federal Rule of Evidence 201, a court may take judicial notice of “matters of public record.” Mack v. S. Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986). Otherwise, if the district court considers materials outside of the pleadings, the motion to dismiss is converted into a motion for summary judgment. See Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th Cir. 2001).

         If the court grants a motion to dismiss for failure to state a claim, leave to amend should be granted unless it is clear that the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992). Pursuant to Rule 15(a), the court should “freely” give leave to amend “when justice so requires, ” and in the absence of a reason such as “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of the amendment, etc.” Foman v. Davis, 371 U.S. 178, 182 (1962).

         III. DISCUSSION

         Defendants seek to dismiss this case because they argue that the investors knew the risks associated with their investment, but they are “now unhappy with their lack of profits.” (Def. Mot. to Dismiss (“MTD”) 2:4-5, ECF No. 11). Defendants further contend that Plaintiffs' security fraud claims are both “barred by the statute of limitations” and “unsubstantiated.” (Id. 2:6-7). Further, Defendants assert that Plaintiffs' “federal RICO claim fails because it is based on securities fraud.” (Id. 2:7-8). Lastly, Defendants argue that all state law claims should ...


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