Talece Inc. v. Zheng Zhang

TALECE INC., Plaintiff, v. ZHENG ZHANG, Defendant.

Case No. 20-cv-03579-BLF

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

October 22, 2020

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS WITH LEAVE TO AMEND

[Re: ECF 9]

Defendant Zheng Zhang ("Defendant") brings a Motion to Dismiss Plaintiff Talece Inc.'s ("Plaintiff") Complaint. Mot., ECF 9. Plaintiff brought suit alleging four causes of action: breach of fiduciary duties, unjust enrichment, conversion, and accounting. See Ex. A, Compl. ¶¶ 21-41, ECF 1-1. Defendant moves to dismiss the Complaint for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6). Mot. 1, 5. Particularly, Defendant claims Plaintiff failed to meet the heightened pleading requirements for allegations based on fraud under Rule 9(b). Id. at 2; Reply 2, ECF 16. In addition, Defendant requests this Court strike portions of evidence Plaintiff filed in support of its Opposition to Defendant's Motion to Dismiss, asserting lack of foundation, lack of personal knowledge, unsworn statements, and hearsay. See Reply 7-11.

Having considered the briefing of the parties, the Court GRANTS Defendant's Motion to Dismiss, with leave to amend.

I. BACKGROUND

a. Procedural History

Plaintiff filed its initial complaint in the above-captioned action in Santa Clara County Superior Court on May 18, 2020. See Compl. Ten days later, on May 28, 2020, Defendant removed the case to this Court. See Notice of Removal, ECF 1. Plaintiff filed a motion to remand the case on July 13, 2020. See Mot. to Remand, ECF 17. Plaintiff's motion to remand was denied on September 8, 2020. See Order Den. Mot. to Remand, ECF 23.

On June 10, 2020, Defendant filed his motion to dismiss. See Mot. Plaintiff filed its Opposition to Defendant's Motion to Dismiss on June 24, 2020. See Opp'n, ECF 11. Defendant filed his corrected Reply to Plaintiff's Opposition on July 2, 2020. See Reply. Pursuant to Civil Local Rule 7-1(b), the Court finds that Defendant's is appropriate for determination without oral argument.

b. Factual History

Plaintiff is a Delaware corporation with its principal place of business in Santa Clara, California. Compl. ¶ 2. Defendant is the former Chief Executive Officer (CEO) and former Chief Financial Officer (CFO) of Plaintiff. Id. ¶ 3.

Plaintiff describes itself as an "e-commerce website platform for [the] construction industry." Id. ¶ 2. Plaintiff's software system "enable[s] a user to design a single-family house on their laptop and have a builder company come in and build [a] customized home after the user furnishe[s] payment to [Plaintiff]." Mot. 3. In this way, "a user could personalize their home design, without being required to possess [] building construction expertise." Id. Plaintiff also "empower[s] potential owners of commercial buildings in similar ways." Id. at 4.

Plaintiff brings four causes of action against Defendant: breach of fiduciary duty, unjust enrichment, conversion, and accounting. Compl. ¶¶ 21-41. Plaintiff alleges that from February 4, 2019, to February 14, 2020, Defendant "concealed Plaintiff Talece's business information from Plaintiff Talece's corporate secretary and the majority shareholders." Id. ¶ 11. Plaintiff also alleges that Defendant "misappropriate[ed] Plaintiff's funds, properties, and trade secrets, and utiliz[ed] Plaintiff's assets in wanton instances of self-dealing." Id. ¶ 12. On information and belief, Plaintiff alleges Defendant "embezzled the corporation's capital funds" and "transferred Plaintiff's funds to at least one bank account [and additional unknown bank accounts]" managed by Defendant. Id. ¶¶ 14-16. Plaintiff also alleges on information and belief that Defendant "stole Plaintiff Talece'ssoftware, codes for website e-commerce platform and other technical information, as well as accounting books, check books, and other assets" and caused Plaintiff to engage in transactions in a way that violated the Immigration and Nationality Act and other employment regulations. Id. ¶¶ 17-18.

Defendant moves to dismiss Plaintiff's complaint for failing to state a claim, pursuant to Rule 12(b)(6). Mot. 1, 5. Defendant argues that Plaintiff failed to meet the heightened pleading standard for fraud-related allegations under Rule 9(b). Id. at 2, 5-6. Defendant also requests to strike portions of evidence Plaintiff filed in support of its Opposition to Defendant's Motion to Dismiss. Reply 7-11. Plaintiff opposes the Motion on the grounds that its Complaint neither alleges fraud nor relies on the elements of fraud and thus Rule 9(b) does not apply. Opp'n 2-4. Plaintiff also maintains that if the heightened pleading standard under Rule 9(b) does apply, Plaintiff's complaint would still be considered well-plead. Id. at 4-6.

II. LEGAL STANDARD

a. Rule 12(b)(6) Motion to Dismiss: General Requirements

A motion to dismiss under Rule 12(b)(6) concerns what facts a plaintiff must plead on the face of his complaint. Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Id. Any complaint that does not meet this requirement can be dismissed pursuant to Rule 12(b)(6). In interpreting Rule 8(a)'s "short and plain statement" requirement, the Supreme Court has held that a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), which requires that "the plaintiff plead[] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). This standard does not ask the Plaintiff to plead facts that suggest he will probably prevail, but rather "it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (internal quotation marks omitted). The Court must "accept factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party." Manzarek v. St. Paul Fire &Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). The Court is not, however, forced to "assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (internal citation omitted).

b. Fraud Pleadings Under Rule 9(b)

When a party pleads a cause of action for fraud or mistake, it is subject to the heightened pleading requirements of Rule 9(b). "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b) (emphasis added). "Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Id. Rule 9(b) demands that the circumstances constituting any alleged fraud be plead "specific[ally] enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong." Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (internal citation omitted). Claims of fraud must be accompanied by the "who, what, when, where, and how" of the misconduct alleged. Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997), superseded by statute on other grounds (internal citation omitted).

If a "claim is said to be 'grounded in fraud' or to 'sound to fraud,' [then] the pleading of that claim as a whole must satisfy that particularity requirement of Rule 9(b)." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003). For example, a claim may be "grounded in fraud" if the "plaintiff [] allege[s] a unified course of fraudulent conduct and rel[ies] entirely on that course of conduct as the basis of a claim." Id. at 1103.

The applicability of Rule 9(b) hinges not on the elements of the claim but rather on the nature of the allegations themselves: "Rule 9(b) applies to 'averments of fraud' in all civil cases in federal district court . . . in cases in which fraud is not an essential element of the claim, Rule 9(b) applies, but only to particular averments of fraud." Id.; see also Kearns, 567 F.3d at 1124 ("Where fraud is not an essential element of a claim, only those allegations of a complaint which aver fraud are subject to Rule 9(b)'s heightened pleading standard."). Fraud can thus be averred "by specifically alleging fraud, or by alleging facts that necessarily constitute fraud (even if the word 'fraud' is not used)." Vess, 317 F.3d at 1105 (citations omitted).

III. DISCUSSION

Although Plaintiff's claims may arise under state law, Plaintiff's allegations are subject to the Federal Rules of Civil Procedure. Kearns, 567 F.3d at 1125 (quoting Vess, 317 F.3d at 1102) ("[T]he Federal Rules of Civil Procedure apply in federal court, 'irrespective of the source of the subject matter jurisdiction, and irrespective of whether the substantive law at issue is state or federal.'").

In his Motion, Defendant argues that Plaintiff's entire complaint is grounded in fraud because Plaintiff accuses Defendant of "stealing money," embezzlement, and misappropriation of funds and trade secrets. Mot. 2, 6-9. Defendant maintains that Plaintiff fails to allege the what, when, where, and how required by Rule 9(b). Id. at 6-9; see Cooper, 137 F.3d at 627. Plaintiff has responded to Defendant's Motion by stating none of its claims "involve or require fraud elements explicitly or implicitly." Opp'n 2. However, as mentioned above, "in cases in which fraud is not an essential element of the claim, Rule 9(b) [still] applies [] to particular averments of fraud." Vess, 317 F.3d at 1103 (emphasis added). Plaintiff's reliance on the elements of the causes of action rather than the particular allegations against Defendant is therefore unpersuasive. See Opp'n 2-4. Plaintiff also implies that the language in the Complaint referencing fraud...