Cuadrado v. Sun Hung Kai Strategic Capital Ltd.

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EMMA CUADRADO, IN HER CAPACITY AS TRUSTEE OF THE DANIEL V. TIERNEY 2011 TRUST, AND SERENITY INVESTMENTS LLC, Plaintiffs, v. SUN HUNG KAI STRATEGIC CAPITAL LIMITED, Defendant.

No. 4:22-cv-01623-YGR

United States District Court, N.D. California

April 4, 2023

ORDER GRANTING MOTION TO DISMISS

DKT. NO. 42

YVONNE GONZALEZ ROGERS UNITED STATES DISTRICT COURT JUDGE

Plaintiffs Emma Cuadrado, in her capacity as Trustee of Daniel V Tierney 2011 Trust, and Serenity Investments LLC (collectively, “Tierney”) bring this action against defendant Sun Hung Kai Strategic Capital Limited (“SHK”) in connection with a dispute concerning the transfer from Tierney to SHK of stock in Social Finance Inc. (“SoFi”). In their First Amended Complaint Tierney alleges four counts relating to the transfer: (1) conversion; (2) receipt of stolen property; (3) fraud, and (4) negligent misrepresentation. Before the Court is SHK's motion to dismiss Tierney's fraud and negligent misrepresentation claims.

Having carefully considered the papers submitted and the pleadings in this action and for the reasons below, the Court hereby GRANTS the motion to dismiss WITHOUT FURTHER LEAVE to Amend.

I. BACKGROUND

The following facts are alleged in Tierney's First Amendment Complaint (“FAC”).

A. Initial Negotiations Regarding Stock Transfer

On August 21, 2017, the parties executed a Stock Transfer Agreement (“STA”) pursuant to which Tierney agreed to sell 101,640 Series E Preferred Stock shares in SoFi to SHK in exchange for approximately $1.6 million. (FAC ¶ 9.)^[1] Shortly thereafter, on or about September 12, 2017, the parties agreed to put the stock transfer “on hold” after SHK shared misgivings about investing in SoFi considering negative press reports implicating the company.^[2] (Id. ¶ 10.) The parties continued to discuss the state of the STA over the course of the fall of 2017, and in December, SHK informed Tierney it wished to cancel the STA and any obligations owed Tierney thereunder. (Id. ¶¶ 14-15.) Tierney agreed, and the agreement was voided. (Id. ¶ 15.)

However, SHK had in fact come into possession of the SoFi shares in question on or about September 27, 2017, at which point Tierney's stock certificates^[3] for the relevant shares were cancelled and new certificates issued by SoFi under SHK's name. (Id. ¶ 12.) SHK did not immediately inform Tierney of the transfer upon receipt of the certificates, pay Tierney for the shares, or return the stock to Tierney. (Id. ¶¶ 15-17.) Relatedly, Tierney did not insist on payment for the shares as they remained unaware the transfer had been effectuated. (Id. ¶¶ 11, 15.)

B. Discovery of Stock Transfer & Subsequent Negotiations

Nearly four years elapsed before Tierney learned the shares had long since been transferred to SHK. On May 13, 2021, SoFi sent a message to shareholders regarding a previously announced merger of SoFi with another company in which it instructed shareholders to redeem their physical stock certificates in SoFi for book-entry SoFi shares. (Id. ¶ 18; Dkt. No. 36 at Exhibit B.) SoFi also enabled shareholders who lost their physical stock certificates to submit an affidavit requesting replacements which could be converted into book-entry shares. (FAC ¶ 18.) Following the announcement, SHK submitted such an affidavit so that it could convert the shares it held in SoFi into book-entry shares. (Id. ¶ 21; Dkt. No. 36 at Exhibit C.) When Tierney asked SoFi why they had not received book-entry SoFi shares in exchange for their physical stock certificates, they were informed the shares in question had been transferred to SHK in 2017. (FAC ¶ 22.)

Tierney immediately contacted SHK to demand return of the stock. (Id. ¶ 23.) SHK responded that Tierney's “broker, SoFi and SoFi's outside legal counsel . . . were responsible for making the unauthorized transfer” and suggested the parties discuss potential remedies with SoFi's legal counsel. (Id.) As discussions with SoFi progressed, SHK offered to pay Tierney the value of the stock as stipulated in the STA. (Id. ¶ 24.) Tierney rejected this offer, however, as the value of the shares had increased in the years since the STA was negotiated to over $4 million. (Id.) Tierney commenced this action shortly thereafter when it had not received payment or return of the shares from SHK. (Id. ¶¶ 25-26.) SHK did, however, eventually return the converted, bookentry SoFi shares to Tierney, although the stock had by that point “dropped over 40 [percent] in value.” (Id. ¶ 26.)

C. First Motion to Dismiss

Shortly after Tierney commenced this action, SHK filed a motion to dismiss each of plaintiffs' causes of action for failure to state a claim under Rule 12(b)(6). (Dkt. No. 10.) The Court considered that motion at a hearing held on September 28, 2022, at which the Court denied defendant's motion to dismiss as to Tierney's fraud and negligent misrepresentation claims and granted Tierney leave to amend. (Dkt. No. 33 at 1:21-22; accord Dkt. No. 35 at 18:18-20.) In doing so, the Court admonished plaintiffs to include sufficient factual allegations in their amended complaint to substantiate any such claims, which included reminding plaintiff's counsel of his Rule 11 obligations to submit only well-founded arguments for the Court's consideration. The motion to dismiss before the Court in this proceeding was filed by SHK in response to Tierney's FAC. (Dkt No. 42.)

II. LEGAL FRAMEWORK

The standards under Federal Rule of Civil Procedure 12(b)(6) are well-known and not in dispute.

Rule 9(b) requires a party bringing a fraud claim to “state with particularity the circumstances constituting [such] fraud ....” Fed.R.Civ.P. 9(b). Further, “[i]n California, fraud must be pled specifically; general and conclusory allegations do not suffice.”^[4] Lazar v. Super. Ct., 909 P.2d 981, 989 (Cal. 1996). This heightened pleading standard therefore “necessitates pleading facts which show how, when, where, to whom, and by what means [the alleged fraudulent] representations were tendered.” Id. (emphasis in original).

III. ANALYSIS

Tierney advances claims for fraud and negligent misrepresentation under California law. The Court considers each in turn.

A. Fraud

Tierney alleges SHK engaged in fraud by (i) making a series of misrepresentations to Tierney concerning the status of the SoFi stock transfer and (ii) concealing their possession of the SoFi stock certificates from September 2017 through the fall of 2021. (FAC ¶¶ 45-61.) The same elements of fraud apply in both the false representation and fraudulent concealment contexts. “Under California law, ‘[t]he elements of fraud . . . are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.'” Golden Gate Way, LLC v. Enercon Servs., Inc., 572 F.Supp.3d 797, 821 (N.D. Cal. 2021) (citations omitted).

i. Alleged False Representations Concerning the Stock Transfer

Tierney identifies four alleged fraudulent misrepresentations. The Court examines each. First, Tierney alleges that, during negotiations between the parties in the fall of 2017, SHK misrepresented that the STA was “on hold” in order to “surreptitiously transfer [Tierney's] shares without having to pay for them ....” (FAC ¶ 48.) Tierney does not contend this representation by SHK was necessarily false. Indeed, they make no allegations, for example, that SHK wished for the agreement to remain in effect. Instead, Tierney argues this communication by SHK constitutes a misrepresentation because, when making the statement, SHK intended to, at some future date, defraud Tierney. (Dkt. No. 50 at 8:9-12.) Despite the Court's admonitions to plead misrepresentation claims with specificity, Tierney does not plead any additional facts to support the allegation. The Court therefore cannot credit Tierney's bald assertions and finds this statement does not constitute an actionable misrepresentation.

Second Tierney alleges SHK misrepresented its desire to “cancel the [STA]” because SHK had no intention at the time of returning the SoFi shares in its possession to Tierney. (FAC ¶ 10.)^[5] Yet, even were the Court to accept Tierney's argument that this statement was false, Tierney has not sufficiently pled the scienter and intent elements of fraud to make this alleged misrepresentation actionable. Tierney asks the Court to infer SHK's scienter and intent to defraud Tierney from SHK's possession of the SoFi shares at the time the STA was voided. (Dkt. No. 50 at 8:28-9:9.) The Court declines to do so in the absence of more detailed pleadings as to SHK's state of mind at the time the contract was rescinded. Contrary to the Court's instructions at the September 28, 2022 hearing for Tierney to plead its fraud claims with particularity, Tierney has alleged no facts which tend to support such a sweeping inference aside from conclusory statements that amount to repackaging their underlying claims (e.g., “[W]hen it induced [Tierney] to cancel the [STA], [SHK] had no intention of returning the shares it had taken under the agreement and did not have any intention of paying for the shares”). (Id. at 8:28-9:2.)^[6] Rather than alleging facts to substantiate its assertions, Tierney points to authorities suggesting that fraudulent intent can be inferred from circumstantial evidence that a party had no intention of performing a promise made to another party. (See, e.g., Dkt. 50 at 13:8-11 (citing In re Estate of Barrow, 27 Cal.App.2d 402, 405 (1938) for the proposition.) These authorities do little to support Tierney's claims, however, as again, Tierney has not sufficiently pled such circumstantial evidence. As the Court therefore finds the...