1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 EASTERN DISTRICT OF CALIFORNIA 8 9 SOLARMORE MANAGEMENT No. 2:19-cv-02544-JAM-DB SERVICES, INC., a California 10 Corporation, 11 Plaintiff, ORDER GRANTING DEFENDANT

HERITAGE BANK’S MOTION TO

12 v. DISMISS, GRANTING DEFENDANT

DIANA KERSHAW’S MOTION TO JOIN

13 BANKRUPTCY ESTATE OF DC SOLAR AND DENYING DEFENDANT HALO’S SOLUTIONS, et al., MOTION TO JOIN 14 Defendants. 15 16 I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND1 17 This action arises from a fraudulent scheme involving the 18 sale of mobile solar generators. From 2011 to 2018, operators of 19 the scheme, built and sold thousands of these generators. First 20 Am. Compl. (“FAC”) at 5, ECF No. 41. Purchasers paid $150,000.00 21 for each, with a down payment between $35,000.00 and $45,000.00, 22 and a promissory note for the balance payable over twenty years. 23 Id. Purchasers were told the generators would be sublet to end 24 users which would provide a steady flow of revenue to cover any 25 amount owed on the promissory note. Id. The operators also 26

27 1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled 28 for June 8, 2021. 1 represented that the generators qualified for certain energy tax 2 credits. Id. In actuality, many of the purchased generators 3 were never built. Those that were built were not worth 4 $150,000.00, as there was never a market for them and thus no 5 prospects for the promised sublease revenues, and they did not 6 qualify for the represented tax credits. Id. 7 Plaintiff Solarmore Management Services, Inc. is a 8 California corporation and part owner of various limited 9 liability companies (“LLCs”) that purchased mobile solar 10 generators. Id. ¶¶ 1-5. Plaintiff brought this action against 11 three groups of Defendants: (1) Defendants who orchestrated and 12 perpetuated the fraudulent enterprise; (2) Defendants who aided 13 and abetted the fraudulent enterprise; and (3) Defendants who 14 facilitated by hiding money and mobile solar generators (or the 15 lack thereof) from purchases and other investigating parties. 16 Id. at 6. Relevant to this motion, Defendant Heritage Bank of 17 Commerce (“Heritage Bank”), is alleged to have aided and abetted 18 the fraudulent enterprise. Id. ¶ 61. Specifically, Plaintiff 19 claims that Diana Kershaw, acting as an officer, agent, or 20 employee of Heritage Bank, cooperated with the operators of the 21 scheme to conceal or restrict information from Plaintiff about 22 its accounts with Heritage Bank. Id. ¶¶ 61-63. 23 Plaintiff asserts three claims against Heritage Bank: 24 (1) count seven for civil conspiracy; (2) count nineteen for 25 negligent misrepresentation; and (3) count twenty for equitable 26 contribution/indemnification. Id. at 69, 76, 77. Heritage Bank 27 moves to dismiss all claims against it. Def. Heritage Bank’s 28 Mot. to Dismiss (“Mot.”), ECF No. 84. Plaintiff opposes this 1 Motion. Pl.’s Opp’n (“Opp’n”), ECF No. 113. Defendants Halo and 2 Diana Kershaw seek to join Heritage Bank’s Motion. See Def. 3 Halo’s Notice of Joinder, ECF No. 86; Def. Kershaw’s Notice of 4 Joinder, ECF No. 96. For the reasons stated below, the Court 5 grants the Motion to Dismiss all claims against Heritage Bank and 6 Diana Kershaw. Halo’s request to join the Motion is denied. 7 II. OPINION 8 A. Judicial Notice 9 Heritage Bank requests the Court take judicial notice of 10 the California Secretary of State Entity Detail page for 11 Solarmore Management Services, Inc. and a copy of a Motion for 12 Order Approving Compromise and Settlement Agreement and Award of 13 Contingency in the In re Double Jump, Inc., bankruptcy action. 14 See Def. Heritage Bank’s Req. for Judicial Notice (“RJN”), ECF 15 No. 84-2. Plaintiff did not oppose this request. The printouts 16 from the California Secretary of State are a matter of public 17 record whose accuracy cannot be reasonably questioned. See 18 Champion Courage Ltd. v. Fighter’s Mkt., Inc., No. 17-01855-AJB- 19 BGS, 2018 WL 1920201, at *2 (S.D. Cal. Apr. 24, 2018). 20 Accordingly, the Court grants Heritage Bank’s request. The 21 Court, however, does not rely on the second exhibit in this 22 opinion. Thus, it is denied as moot. 23 B. Joinder 24 Defendant Halo Management Services LLC and Diana Kershaw 25 seek to join Heritage Bank’s Motion to Dismiss. See Def. Halo’s 26 Notice of Joinder; Def. Kershaw’s Notice of Joinder. A Rule 27 12(b) motion must be made before filing an answer. Fed. R. Civ. 28 P. 12(b). Here, Halo filed an answer on February 18, 2021, 55 1 days before the filing of the Motion to Dismiss. See Halo’s 2 Answer, ECF No. 52. Thus, Halo’s joinder request is untimely. 3 However, the defense of a failure to state a claim upon which 4 relief can be granted may also be made in a motion for judgment 5 on the pleadings but only after the pleadings have closed. Fed 6 R. Civ. P. 12(h)(2)(B); id. 12(c). Because the pleadings have 7 not closed, a judgment on the pleadings is premature. 8 Accordingly, Halo’s request to join Heritage Bank’s Motion to 9 Dismiss is denied. Plaintiff, however, does not advance any 10 arguments as to why Defendant Kershaw should not be permitted to 11 join Heritage Bank’s Motion. See generally Opp’n. Thus, 12 Defendant Kershaw’s request to join the Motion to Dismiss is 13 granted. 14 C. Legal Standard 15 As an initial matter, the parties frame the issue of 16 whether Plaintiff can bring suit for an injury to the LLC as a 17 Constitutional standing issue appropriate for resolution under 18 Rule 12(b)(1) of the Federal Rules of Civil Procedure. See Mot. 19 at 1, 4-7; Opp’n 3-7. However, this is really a prudential 20 standing issue appropriate for resolution under 12(b)(6). See 21 Johnson v. Myers, CV-11-00092 JF (PSG), 2011 WL 4533198, at *4 22 (N.D. Cal. Sept. 30, 2011). 23 Dismissal is appropriate under Rule 12(b)(6) of the Federal 24 Rules of Civil Procedure when a plaintiff’s allegations fail “to 25 state a claim upon which relief can be granted.” Fed. R. Civ. 26 P. 12(b)(6). “To survive a motion to dismiss a complaint must 27 contain sufficient factual matter, accepted as true, to state a 28 claim for relief that is plausible on its face.” Ashcroft v. 1 Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and 2 citation omitted). While “detailed factual allegations” are 3 unnecessary, the complaint must allege more than “[t]hreadbare 4 recitals of the elements of a cause of action, supported by mere 5 conclusory statements.” Id. “In sum, for a complaint to 6 survive a motion to dismiss, the non-conclusory ‘factual 7 content,’ and reasonable inferences from that content, must be 8 plausibly suggestive of a claim entitling the plaintiff to 9 relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 10 2009). 11 D. Analysis 12 1. Suspension of the Corporate Entity 13 “The capacity of a corporate litigant to sue or be sued in 14 a federal case is directly controlled by Fed. R. Civ. P. 17(b) 15 which provides, in pertinent part, ‘[t]he capacity of a 16 corporation to sue or be sued shall be determined by the law 17 under which it is organized.’” Matter of Christian & Porter 18 Aluminum Co., 584 F.2d 326, 331 (9th Cir. 1978) (quoting Fed. R. 19 Civ. P. 17(b)). California Revenue and Taxation Code Section 20 23301 provides that “[e]xcept for the purposes of filing an 21 application for exempt status or amending the articles of 22 incorporation as necessary either to perfect that application or 23 to set forth a new name, the corporate powers, rights and 24 privileges of a domestic taxpayer may be suspended [. . .] if a 25 taxpayer fails to file a tax return required by this part.” 26 Cal. Rev. & Tax. Code § 23301.5. “This means that a suspended 27 corporation may not prosecute or defend an action.” Timberline 28 Inc. v. Jaisinghani, 54 Cal.App.4th 1361, 1365 (1997). When a 1 corporation’s suspended status “comes to light during 2 litigation, the normal practice is for the trial court to permit 3 a short continuance to enable the suspended corporation to 4 effect reinstatement.” Id. at 1366. 5 Heritage Bank first argues that this action should be 6 dismissed as Solarmore is a suspended corporation and thus 7 cannot prosecute this action. Mot. at 4. Solarmore concedes 8 that it is a suspended corporate entity. Opp’n at 5. However, 9 it requests a short continuance as it has already cured the 10 deficiencies that caused its suspension and is awaiting 11 reinstatement. Id. While the normal practice is to grant a 12 short continuance to enable the suspended corporation to obtain 13 reinstatement, see Timberline, 54 Cal.App.4th at 1365, the Court 14 declines to do so here, as dismissal is warranted on other 15 grounds for the reasons set forth below. 16 2. LLC Member Prudential Standing 17 A direct action by a shareholder or member is a suit to 18 enforce a right which the shareholder or member possesses as an 19 individual. See PacLink Commc’ns Int’l v. Superior Court, 90 20 Cal.App.4th 958, 964 (2001). In general, shareholders of a 21 corporation or members of an LLC lack prudential standing to 22 assert individual claims based on harm to the corporation or LLC 23 in which they own shares. Erlich v. Glasner, 418 F.2d 226, 227 24 (9th Cir. 1969); PacLink, 90 Cal.App.4th at 965-66. A 25 derivative suit on the other hand, “seeks to recover for the 26 benefit of the corporation and its whole body of shareholders 27 when [the] injury is caused to the corporation.” Jones v. H.F. 28 Ahmanson & Co., 460 P.2d 464, 470 (Cal. 1969). A shareholder or 1 member bringing a derivative action must meet certain procedural 2 requirements. Fed. R. Civ. P. 23.1; Sax v. World Wide Press, 3 Inc., 809 F.2d 610, 613 (9th Cir. 1987). “[T]he 4 characterization of an action as derivative or direct is a 5 question of state law.” Sax, 809 F.2d at 613. Here, The LLCs 6 are California companies, see FAC ¶ 2, accordingly, California 7 law applies. See Lapidus v. Hecht, 232 F.3d 679, 682 (9th Cir. 8 2000). 9 PacLink Communications International Inc. v. Superior Court 10 is instructive here. In that case PacLink Communications, an 11 LLC, transferred its assets to a new company. PacLink, 90 12 Cal.App.4th at 962. Plaintiffs, members of PacLink, sued 13 alleging this transfer of assets was done without their 14 knowledge or consent. Id. The plaintiffs claimed that the 15 transfer rendered PacLink insolvent, defrauding plaintiffs by 16 preventing them from being paid their ownership interest. Id. 17 at 962-63. Defendants filed a demurrer arguing that plaintiffs 18 lacked standing as the real party in interest was the LLC and 19 plaintiffs had failed to comply with the procedural requirements 20 of initiating a derivative action. Id. at 963. The court 21 agreed, finding the claims belonged to the LLC and were 22 improperly pled as a personal cause of action. Id. at 965. 23 In so holding, the court explained that the “essence of the 24 plaintiff’s claims [were] that the assets of [PacLink] were 25 fraudulently transferred without any compensation being paid to 26 the LLC.” Id. at 964. It noted that “because members of the 27 LLC hold no direct ownership interest in the company’s assets 28 the members cannot be directly injured when the company is 1 improperly deprived of those assets.” Id. (citing Cal. Corp. 2 Code § 17300). Rather plaintiffs’ “injury was essentially a 3 diminution in the value of their membership interest in the LLC 4 occasioned by the loss of the company’s assets” which was merely 5 incidental to the injury suffered by the LLC. Id. “Because the 6 gravamen of the complaint [was] injury to the whole body of the 7 LLC’s members, it was for the LLC to institute and maintain a 8 remedial action. A derivative action would have been 9 appropriate if its responsible officials had refused or failed 10 to act.” Id. at 966 (quoting Nelson v. Anderson, 72 Cal.App.4th 11 111, 125-26 (1999)). 12 Here, the Complaint alleges that Plaintiff was the managing 13 member and part owner of various LLC’s that purchased mobile 14 solar generators. FAC ¶¶ 2, 5, 114, 115, 122, 131, 134, 139, 15 149, 154, 482. All the claims against Heritage Bank seek 16 redress from being fraudulently induced to make those purchases. 17 See generally FAC. Thus, similar to the plaintiffs in PacLink, 18 the harm suffered by Plaintiff was a diminution in the value of 19 its membership interest in the LLCs due to their purchase of 20 generators. PacLink, 90 Cal.App.4th at 964. This injury is 21 merely incidental to the injury suffered by the LLC. Id. 22 “Because the gravamen of the complaint is injury to the whole 23 body of the LLC’s members, it [is] for the LLC to institute and 24 maintain a remedial action.” Id. at 966 (quoting Nelson v. 25 Anderson, 72 Cal.App.4th at 125-26). 26 Accordingly, Plaintiff lacks prudential standing to bring a 27 direct cause of action and has not purported nor gone through 28 the required steps of bringing a derivative action. See Opp’n nee enn ene en nnn non nnn en nn I OE NO

1] at 6.2 2 IIl. ORDER 3 For the reasons set forth above, the Court GRANTS Defendant 4 Heritage Bank and Diana Kershaw’s Motion to Dismiss all claims 5 against them: count seven for civil conspiracy, count nineteen 6 for negligent misrepresentation, and count twenty for equitable 7 contribution/ indemnification. These claims are DISMISSED 8 WITHOUT PREJUDICE. See Fleck & Assocs., Inc. v. City of Phoenix, 9 471 F.3d 1100, 1106-07 (9th Cir. 2006) (dismissal for lack of 10 standing should be without prejudice). Defendant Halo’s request 11 to join the Motion to Dismiss is DENIED. If Plaintiff elects to 12 amend its complaint, it shall file an Amended Complaint within 13 twenty (20) days of this Order. Defendants’ Heritage Bank and 14 Kershaw’s responsive pleadings are due twenty (20) days 15 thereafter. 16 IT IS SO ORDERED. 17 | Dated: July 20, 2021 18 kA 19 teiren staves odermacr 7008 20 21 22 23 24 25 26 27 2 Because dismissal is warranted for this reason, the Court does not address the parties remaining arguments as to whether 28 | Plaintiff has stated a claim.