Castel S.A. v. Wilson

CASTEL S.A., a Luxembourg joint stock company (societe anonyme), Plaintiff, v. CHRISTOPHER A. WILSON, an individual;PHAROS CAPITAL PARTNERS II, LP, a Delaware limited partnership;PHAROS CAPITAL PARTNERS II-A, LP, a Delaware limited partnership;OLIVIA HO CHENG, an individual;ARF PARTNERS, LLC, a Massachusetts corporation;AURORA HEALTHCARE US CORP, a Massachusetts corporation;STEVEN J. JAMES, an individual. Defendants.

Case No.: 2:19-cv-09336-ODW-(MAAx)

United States District Court Central District of California

July 15, 2020

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS [46, 47, 48, 49]

I. INTRODUCTION

Before the Court are four motions:

1. A Motion to Dismiss under Federal Rule of Civil Procedure ("Rule") 12(b)(6) filed by defendant Christopher Wilson ("Wilson"). (See Wilson Mot. to Dismiss ("Wilson Mot."), ECF No. 46.)

2. A Motion to Dismiss under Rules 12(b)(2), 12(b)(6), and 9(b) filed by defendants Pharos Capital Partners II, LP, and Pharos Capital Partners II-A, LP (collectively, "Pharos"). (See Pharos Mot. to Dismiss ("Pharos Mot."), ECF No. 47.)

3. A Motion to Dismiss under Rule 12(b)(6) filed by defendants Olivia Ho Cheng ("Cheng") and ARF Partners, LLC ("ARF") (collectively, the "ARF Defendants"). (See ARF Mot. to Dismiss ("ARF Mot."), ECF No. 48.)

4. A Motion to Dismiss under Rules 12(b)(6) and 12(b)(2) filed by defendants Aurora Healthcare US Corp. ("Aurora") and Steven James ("James") (collectively, the "Aurora Defendants"). (See Aurora Mot. to Dismiss ("Aurora Mot."), ECF No. 49.)

Defendants' motions have been fully briefed. For the following reasons, the Court GRANTS IN PART and DENIES IN PART Defendants' motions.¹

II. PLAINTIFF'S ALLEGATIONS

Plaintiff Castel S.A., a Luxembourg joint stock company (societe anonyme) ("Plaintiff") filed its First Amended Complaint ("FAC") on January 29, 2020, alleging eight causes of action against seven defendants. (See FAC, ECF No. 44.) The FAC describes the insolvency and sale of Aurora Imaging Technology, Inc. ("AIT"), a company with a California principal place of business that developed, manufactured, and sold a system used to perform breast MRIs. (FAC ¶¶ 21, 31-39.)

Plaintiff first invested in AIT on June 19, 2006, purchasing 1,010,101 shares of AIT's Series C preferred stock in accordance with the Series C Preferred Stock Purchase Agreement between Plaintiff and AIT.² (FAC ¶ 23.) Plaintiff again invested in AIT on July 15, 2008, purchasing 512,821 shares of AIT's Series D preferred stock in accordance with the Series D Preferred Stock Purchase Agreement.³ (FAC ¶ 24.) Plaintiff therefore owned almost 4% of AIT and was at all relevant times a minority shareholder of AIT. (FAC ¶ 25.) In addition to stock, Plaintiff lent $250,000 to AIT on March 14, 2011, documented by a promissory note. (FAC ¶ 26.) Pharos owned 83.3% of the Series C and Series D Preferred Stock of AIT and held $3,300,000 in senior secured promissory notes in AIT. (FAC ¶ 27.)

Cheng was the President and CEO of AIT from 2002 to 2012, but was "basically forced to resign" by AIT's Board of Directors in 2012. (FAC ¶¶ 76-77.) Cheng owned 185,814 shares of Series A preferred stock, 66,750 shares of Series B preferred stock, and 264,697 shares of Common Stock of AIT. (FAC ¶ 78.) Cheng is also the owner and manager of ARF, a Massachusetts limited liability company that purchased Pharos's notes and investments in AIT as described below. (FAC ¶ 79.)

By mid-2015, AIT was over $20,000,000 in debt and insolvent. (FAC Ex. H 4-5, ECF No. 44-8.) Around that time, AIT hired Wilson as its CEO to guide it through bankruptcy. (FAC ¶¶ 53-55.) "At all relevant times," Wilson owned 17,811 shares of common stock, 13,122 shares of Series A preferred stock, and 625 shares of Series B preferred stock of AIT. (FAC ¶ 56.)

On November 25, 2015, Pharos entered into a Stock and Note Purchase Agreement⁴ under which Cheng, through ARF, purchased Pharos's secured notes and shares of AIT for $450,000. (FAC ¶¶ 28, 79, 82-83.) This transaction was approved by Wilson as CEO of AIT. (FAC ¶ 58.) Cheng thereafter began negotiations to purchase AIT's assets through Aurora Healthcare SPC, of which Cheng was the manager and CEO. (FAC ¶¶ 31-33, 39.)

On October 20, 2016, Wilson informed Plaintiff that AIT "received only one offer to purchase the assets of the business for $8,500,000, which we are going to accept, subject to the approval of the shareholders." (See FAC Ex. H, ECF No. 44-7.) Wilson also wrote that the purchase price was insufficient to pay AIT's existing debts, and the sale's proceeds would therefore be "distributed pro rata to all debtors, subject to their signing a settlement agreement and mutual release." (FAC Ex. H.) Plaintiff objected to the sale, stating that it did not have sufficient information to make an informed decision and that it was entitled to receive all material information concerning the proposed sale. (See FAC Ex. G, ECF No. 44-8.) Wilson responded that "I am happy to provide any information you want to receive" and attached AIT's financial statements for the previous five years showing more liabilities than assets, including over $12,000,000 in past due loans. (See FAC Ex. G.) Wilson continued: "The current owner of the senior secured debt originally issued to Pharos could have acquired all of the assets of the company by commencing legal proceedings, which would have left nothing for any of the unsecured creditors. While the current offer is less than we hoped, it is the only offer we have that returns any amounts to the unsecured creditors. If you have specific information you would like to see, please let me know. We can also make all of the company records available to you at the company offices in Danvers, Massachusetts." (FAC Ex. G.) Plaintiff objected again, stating that Wilson's communications did not constitute all material information concerning the proposed sale, and that those communications were "inaccurate or misleading." (See FAC Ex. G.)

Despite Plaintiff's objections, Aurora Healthcare SPC and AIT executed the Asset Purchase Agreement⁵ on October 31, 2016 in which Aurora Healthcare SPC agreed to purchase AIT's assets for $8,500,000. (FAC ¶ 37.) The purchase price consisted of $4,300,000 in secured debt originally held by Pharos and $4,200,000 in cash. (See Asset Purchase Agreement § 3, ECF No. 44-9.) The Asset Purchase Agreement stated that the $4,300,000 in secured debt "would otherwise be due and payable to Buyer, as the holder of the senior secured debt of [s]eller to Pharos Capital Partners, L.P. and its affiliates." (Asset Purchase Agreement § 3.1.)

Upon Plaintiff's information and belief, the Asset Purchase Agreement allowed Cheng to purchase Pharos's notes for "pennies on the dollar," and then receive $4,300,000 through Aurora Healthcare SPC at Plaintiff's expense. (FAC ¶ 39.) Plaintiff cites an unexecuted Waiver, Acknowledgement and Agreement Buyer Equity Conversion ("Waiver")⁶ dated November 15, 2016. (FAC ¶ 40.) According to Plaintiff, the Waiver shows that AIT agreed to use $4,000,000 of the purchase price to pay toward debt held by ARF and BE Pacific Management Consulting Co, LTC, a separate lender to AIT. (FAC ¶ 40.) Plaintiff also alleges that BE Pacific Management Consulting Co, LTC and ARF would receive an equity interest in Aurora Healthcare SPC in exchange for their loans to AIT through the Waiver, an arrangement Plaintiff describes as a "kickback." (FAC ¶ 40.)

Upon Plaintiff's information and belief, Aurora Healthcare SPC then transferred all or substantially all assets into Aurora to avoid liabilities on Plaintiff's note. (FAC ¶¶ 44-46.) Cheng founded Aurora and was its CEO at the time of this transfer and remains its CEO. (FAC ¶ 81.)

Plaintiff ultimately did not accept the offer of payment from the Asset Purchase Agreement and filed a separate civil action against AIT for breach of contract, account stated, quantum meruit, and declaratory relief. (FAC ¶¶ 47-48.) Plaintiff obtained a judgement in that action against AIT on January 18, 2018 for $338,385.05 with interest. (FAC ¶ 50.) "Through the course of post-judgment discovery and a debtor's examination" of Wilson, "facts and documents first came to light" that gave rise to the instant action. (FAC ¶ 52.)

Based on these allegations, Plaintiff brings the following claims: (1) fraudulent deceit and concealment against Wilson; (2) fraudulent concealment and deceit against James and Cheng; (3) fraudulent deceit and concealment against Pharos and ARF; (4) breach of fiduciary duty against Wilson; (5) breach of fiduciary duty against Pharos, ARF, and Cheng; (6) civil conspiracy against all defendants; (7) breach of contract against Pharos and ARF; and (8) unjust enrichment against Pharos and ARF. (FAC ¶¶ 98-175.)

III. LEGAL STANDARD

A. Rule 12(b)(2)

Pursuant to Rule 12(b)(2), a party may seek dismissal of an action for lack of personal jurisdiction. Once a party seeks dismissal under Rule 12(b)(2), the plaintiff has the burden of demonstrating that the exercise of personal jurisdiction is proper. Menken v. Emm, 503 F.3d 1050, 1056 (9th Cir. 2007). Where the motion is based on written materials rather than an evidentiary hearing, "the plaintiff need only make a prima facie showing of jurisdictional facts." Sher v. Johnson, 911 F.2d 1357, 1361 (9th Cir. 1990). Accordingly, a court only "inquire[s] into whether [the plaintiff's] pleadings and affidavits make a prima facie showing of personal jurisdiction." Caruth v. Int'l Psychoanalytical Ass'n, 59 F.3d 126, 128 (9th Cir. 1995). Although the plaintiff cannot "simply rest on the bare allegation of its complaint," uncontroverted allegations in the complaint must be taken as true. Amba Mktg. Sys., Inc. v. Jobar Int'l, Inc., 551 F.2d 784, 787 (9th Cir. 1977). Factual disputes are resolved in the plaintiff's favor. Pebble Beach Co. v. Caddy, 453 F.3d 1151, 1154 (9th Cir. 2006).

A federal district court may exercise personal jurisdiction over a...