Fischler Kapel Holdings, LLC v. Flavor Producers, LLC, 2:19-cv-10309-ODW (GJSx)

FISCHLER KAPEL HOLDINGS, LLC, et al., Plaintiffs, v. FLAVOR PRODUCERS, LLC, et al., Defendants.

No. 2:19-cv-10309-ODW (GJSx)

United States District Court, C.D. California

July 12, 2021

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS THE SAC [60] AND DENYING PLAINTIFFS' MOTION FOR LEAVE TO AMEND [65]

OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

Plaintiffs Fischler Kapel Holdings, LLC (“FKH”), Richard Fischler, and Paula Kapel bring a Second Amended Complaint (“SAC”) against Defendants Flavor Producers, LLC (“FPI”) and Jeffrey Harris. (SAC, ECF No. 57.) Before the Court are Defendants' Motion to Dismiss the SAC, and Plaintiffs' Motion for Leave to File a Third Amended Complaint. (Mot. Dismiss SAC (“MTD”), ECF No. 60; Mot. Amend, ECF No. 65.) Both Motions are fully briefed. (See Opp'n MTD, ECF No. 61; Reply MTD ECF No. 63; Opp'n Mot. Amend, ECF No. 70; Reply Mot Amend, ECF No. 71.) As detailed below, Defendants' Motion to Dismiss is GRANTED in part and DENIED in part, and Plaintiffs' Motion for Leave to Amend is DENIED.^[1]

II. BACKGROUND

The pleadings in this action are a jumbled mess. The facts of this case have more or less been detailed in a prior order, the relevant portions of which are hereby incorporated by reference. (See Order Denying Mot. Prelim. Inj. & Granting Mot. Dismiss FAC (“Prior Order”), ECF No. 49.) In short, Plaintiffs accuse Defendants of creating fraudulent financial information or reports and making false representations as to the finances of companies to induce Plaintiffs to enter unprofitable agreements and investments. (See Id. at 2-5; Second Am. Compl. (“SAC”), ECF No. 57.) Specifically, in the SAC, Plaintiffs allege two sets of alleged misrepresentations.

A. First Alleged Misrepresentation - Desire to Maximize CFC Revenue

The first alleged misrepresentation stems from FPI's purchase of a majority interest in Fischler and Kapel's company, Creative Flavor Concepts, Inc. (“CFC”). CFC had two businesses: (1) the design and manufacture of flavors that it sold to sellers of food, beverage, sports nutrition, and dietary products (the “Flavor Business”); and (2) the manufacture of food, beverage, sports nutrition, and dietary products that it sold directly to retail brands and manufacturers (the “Turn-key Business”). (Id. ¶¶ 27-29.)

In 2015, Harris pitched the concept of FPI purchasing CFC, and the parties negotiated over the phone and in person. (Id. ¶¶ 34, 38-44.) During three meetings in April, May, and June 2015, Harris and David Bergstein (FPI's agent) “both represented to Fischler that FPI was interested in development of the Turn-key Business and wished to maximize the revenues (and therefore the EBITDA) of CFC through the creation and utilization of the Ohio Beverage Line.”^[2] (Id. ¶¶ 90 (emphases added), 211.) In June 2015, the parties entered into a “CFC Purchase Agreement” whereby FPI agreed to purchase a majority interest in CFC (the “CFC Acquisition”). (Id. ¶¶ 44, 49, 80.) The CFC Purchase Agreement was amended in March 2016, and under the amended terms, “the valuation of CFC was to be determined based on CFC's EBITDA for 2016.” (Id. ¶¶ 209-10.)

According to Plaintiffs, “Harris and Bergstein's representations that they wished to maximize the revenues . . . of CFC were false.” (Id. ¶ 214.) Specifically, Plaintiffs allege that “the Ohio Beverage Line never operated properly and ultimately cost CFC greatly in profits.” (Id. ¶¶ 91, 113, 213, 333.) Thus, Plaintiffs conclude that “Harris and Bergstein (and therefore FPI) wished to minimize the revenues . . . of CFC so that the ultimate purchase value paid to Plaintiffs would be reduced.” (Id.)

On January 13, 2017, CFC, FPI, and FPI's wholly owned subsidiary, Creative Concepts Holdings, LLC (“CCH”) “entered into an initial asset purchase agreement under which CFC sold its Flavor Business assets to FPI and its Turn-key Business assets to [CCH].” (Id. ¶ 138.) Plaintiffs allege that because of Defendants' successful “scheme” to drive down CFC's revenues, FPI and CCH acquired a majority interest in CFC at a “markedly reduced price.” (Id. ¶ 137.)

B. Second Alleged Misrepresentation - Value of CCH's Assets

The second set of alleged misrepresentations concerns the value of CCH's assets in 2017. Plaintiffs allege that “on March 26, 2017 and April 8, 2015 [sic], Harris and Bergstein stated in telephone calls between themselves, Fischler[, ] and Kapel that CCH had a $20, 000, 000 asset balance sheet value plus prospective business [worth] $4, 5000, 000 [sic] that was guaranteed.” (Id. ¶¶ 150, 223.) “Based on this valuation[, ] Harris and Bergstein represented the value of the CFC Stock at a value of approximately $2, 500, 000.” (Id.) Relatedly, “[o]n April 22, 2017, during a telephone conversation, Bergstein and Harris presented to Fischler and Kapel what was represented to be FPI-prepared financial statements for CCH that confirmed this valuation and contained additional representations concerning the profitability of CCH's wholly owned subsidiary, Biozone Laboratories, Inc. (‘Biozone').” (Id. ¶ 151.)

On May 12, 2017, Defendants formed CCH Acquisition Group, LLC (“CAG”) to “spin off the stock or assets of CCH.” (Id. ¶ 169.) Plaintiffs allege that on May 31, 2017 email, Bergstein emailed Plaintiffs documents regarding CAG and stated, “CCH has a very strong balance sheet with $21 Million in assets and $2.8 Million in liabilities.” (Id. ¶¶ 172, 241, 262, 277, 296, 315.)

Plaintiffs allege that all of these representations about CCH's assets were false. To support falsity, Plaintiffs allege, over and over, that “[i]n June 2018[, ] an independently issued asset appraisal of CCH reflected CCH [sic] liquidated asset value of less than $2, 000, 000, and thus CCH was essentially worthless due to third party financial obligations that exceeded the asset liquidation value.” (Id. ¶¶ 154, 178, 187, 226, 243, 264, 278, 297, 316.)

Based on these alleged misrepresentations, Plaintiffs claim they were fraudulently induced to enter various transactions, as detailed below.

1. CFC Asset Purchase

On April 27, 2017, the initial purchase of CFC's assets was rescinded. (Id. ¶ 140.) Then, on April 28, 2017, the parties entered into a final Asset Purchase Agreement (“APA”), whereby FPI purchased the Flavor Business assets and CCH purchased the Turn-key Business assets, again. (See Id. ¶¶ 141-42.) In exchange for the Turn-key Business, CCH issued a 22% membership interest in CCH (“CCH Stock”) to Fischler and Kapel, who contributed the stock to FKH. (Id. ¶¶ 144-45.) Plaintiffs allege that they would not have entered into the APA if they had known the “true financial status of Biozone and CCH.” (Id. ¶ 233.) Consequently, with their third claim, Plaintiffs seek damages worth “$2, 500, 000, which amount represents the value of the CCH Stock received by Plaintiffs as partial consideration under the [APA].” (Id. ¶ 234.)^[3]

2. Biozone Employment Agreements

On July 1, 2017, Fischler and Kapel agreed to be at-will employees with Biozone (“Biozone Employment Agreements”). (Id. ¶¶ 188-90.) The Biozone Employment Agreements provided lower base compensations than Fischler and Kapel normally received, plus a bonus structure based on CAG's earnings. (Id. ¶¶ 189-90.) Plaintiffs allege that they would not have agreed to the Biozone Employment Agreements had Defendants been honest about CCH's and Biozone's financials. (Id. ¶ 250.) Fischler and Kapel claim they would have respectively earned $233, 333 and $87, 500 more in salaries if they had not been fraudulently induced into the agreements. (Id. ¶¶ 251-52.)

3. Unit Purchase Agreement and Individual CAG Investments

As mentioned, Defendants formed CAG to “spinoff” the stock or assets of CCH. (Id. ¶ 169.) Plaintiffs allege, upon information and belief, that FPI transferred its interest in CCH to CAG “as part of a large-scale plan to transfer all stock in CCH to CAG, and reduce FPI's ownership by soliciting additional investors and redeeming its shares in CAG (the ‘CCH Spinoff').” (Id. ¶ 170.) Allegedly in reliance on Defendants' fraudulent representations about CCH, FKH transferred its interest in CCH to CAG, in exchange for an interest in CAG (the “Unit Purchase Agreement”). (Id. ¶ 182.) Similarly, “Kapel and Fischler also invested an additional $750, 000 in [CAG].” (Id. ¶¶ 16, 185, 284, 287, 320, 325.) But had Plaintiffs been aware of the true financial status of CAG and its subsidiaries, they would not have invested in CAG, either through FKH or individually. (Id. ¶¶ 184, 186, 286, 305, 324.)

C. Causes of Action

Based on the above, Plaintiffs assert the following claims against Defendants in the SAC: (1) fraudulent inducement of the CFC Acquisition; (3) fraudulent inducement of the CFC Asset Sale;^[4] (4) fraudulent inducement of the Biozone Agreements; (5) fraudulent inducement of the Unit Purchase Agreement (i.e., FKH's investment in CAG); (6) fraudulent inducement of the CAG Investment by Fischler and Kapel; and (7-9) securities fraud under 17 C.F.R. § 240.10b-5. (Id. ¶¶ 207-341.)

III. MOTION TO DISMISS

First, the Court considers Defendants' Motion to Dismiss the SAC.

A. Legal Standard

Rule 12(b)(6) provides for dismissal of a complaint for lack of a cognizable legal theory or insufficient facts pleaded to support an otherwise cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). A complaint need only satisfy the minimal notice pleading requirements of Rule 8(a)(2)-a short and plain statement of the claim. Porter v. Jones, 319 F.3d 483, 494 (9th Cir. 2003). But factual “allegations must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S 544, 555 (2007). That is, the complaint must ...