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11 FISCHLER KAPEL HOLDINGS, LLC, et Case № 2:19-cv-10309-ODW (GJSx) al., 12 ORDER GRANTING IN PART AND Plaintiffs, 13 DENYING IN PART MOTION TO v. DISMISS THE SAC [60] AND 14 DENYING PLAINTIFFS’ MOTION FLAVOR PRODUCERS, LLC, et al., 15 FOR LEAVE TO AMEND [65] Defendants. 16 17 I. INTRODUCTION 18 Plaintiffs Fischler Kapel Holdings, LLC (“FKH”), Richard Fischler, and Paula 19 Kapel bring a Second Amended Complaint (“SAC”) against Defendants Flavor 20 Producers, LLC (“FPI”) and Jeffrey Harris. (SAC, ECF No. 57.) Before the Court are 21 Defendants’ Motion to Dismiss the SAC, and Plaintiffs’ Motion for Leave to File a 22 Third Amended Complaint. (Mot. Dismiss SAC (“MTD”), ECF No. 60; Mot. Amend, 23 ECF No. 65.) Both Motions are fully briefed. (See Opp’n MTD, ECF No. 61; Reply 24 MTD, ECF No. 63; Opp’n Mot. Amend, ECF No. 70; Reply Mot. Amend, ECF 25 No. 71.) As detailed below, Defendants’ Motion to Dismiss is GRANTED in part 26 and DENIED in part, and Plaintiffs’ Motion for Leave to Amend is DENIED.1 27

28 1 After carefully considering the papers filed in connection with the Motions, the Court deemed the matters appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. 1 II. BACKGROUND 2 The pleadings in this action are a jumbled mess. The facts of this case have 3 more or less been detailed in a prior order, the relevant portions of which are hereby 4 incorporated by reference. (See Order Denying Mot. Prelim. Inj. & Granting Mot. 5 Dismiss FAC (“Prior Order”), ECF No. 49.) In short, Plaintiffs accuse Defendants of 6 creating fraudulent financial information or reports and making false representations 7 as to the finances of companies to induce Plaintiffs to enter unprofitable agreements 8 and investments. (See id. at 2–5; Second Am. Compl. (“SAC”), ECF No. 57.) 9 Specifically, in the SAC, Plaintiffs allege two sets of alleged misrepresentations. 10 A. First Alleged Misrepresentation – Desire to Maximize CFC Revenue 11 The first alleged misrepresentation stems from FPI’s purchase of a majority 12 interest in Fischler and Kapel’s company, Creative Flavor Concepts, Inc. (“CFC”). 13 CFC had two businesses: (1) the design and manufacture of flavors that it sold to 14 sellers of food, beverage, sports nutrition, and dietary products (the “Flavor 15 Business”); and (2) the manufacture of food, beverage, sports nutrition, and dietary 16 products that it sold directly to retail brands and manufacturers (the “Turn-key 17 Business”). (Id. ¶¶ 27–29.) 18 In 2015, Harris pitched the concept of FPI purchasing CFC, and the parties 19 negotiated over the phone and in person. (Id. ¶¶ 34, 38–44.) During three meetings in 20 April, May, and June 2015, Harris and David Bergstein (FPI’s agent) “both 21 represented to Fischler that FPI was interested in development of the Turn-key 22 Business and wished to maximize the revenues (and therefore the EBITDA) of CFC 23 through the creation and utilization of the Ohio Beverage Line.”2 (Id. ¶¶ 90 24 (emphases added), 211.) In June 2015, the parties entered into a “CFC Purchase 25 Agreement” whereby FPI agreed to purchase a majority interest in CFC (the “CFC 26 Acquisition”). (Id. ¶¶ 44, 49, 80.) The CFC Purchase Agreement was amended in 27

28 2 Although Plaintiffs do not specify in their pleadings, the Court presumes that “EBITDA” stands for: earnings before interest, taxes, depreciation, and amortization. 1 March 2016, and under the amended terms, “the valuation of CFC was to be 2 determined based on CFC’s EBITDA for 2016.” (Id. ¶¶ 209–10.) 3 According to Plaintiffs, “Harris and Bergstein’s representations that they 4 wished to maximize the revenues . . . of CFC were false.” (Id. ¶ 214.) Specifically, 5 Plaintiffs allege that “the Ohio Beverage Line never operated properly and ultimately 6 cost CFC greatly in profits.” (Id. ¶¶ 91, 113, 213, 333.) Thus, Plaintiffs conclude that 7 “Harris and Bergstein (and therefore FPI) wished to minimize the revenues . . . of 8 CFC so that the ultimate purchase value paid to Plaintiffs would be reduced.” (Id.) 9 On January 13, 2017, CFC, FPI, and FPI’s wholly owned subsidiary, Creative 10 Concepts Holdings, LLC (“CCH”) “entered into an initial asset purchase agreement 11 under which CFC sold its Flavor Business assets to FPI and its Turn-key Business 12 assets to [CCH].” (Id. ¶ 138.) Plaintiffs allege that because of Defendants’ successful 13 “scheme” to drive down CFC’s revenues, FPI and CCH acquired a majority interest in 14 CFC at a “markedly reduced price.” (Id. ¶ 137.) 15 B. Second Alleged Misrepresentation – Value of CCH’s Assets 16 The second set of alleged misrepresentations concerns the value of CCH’s 17 assets in 2017. Plaintiffs allege that “on March 26, 2017 and April 8, 2015 [sic], 18 Harris and Bergstein stated in telephone calls between themselves, Fischler[,] and 19 Kapel that CCH had a $20,000,000 asset balance sheet value plus prospective business 20 [worth] $4,5000,000 [sic] that was guaranteed.” (Id. ¶¶ 150, 223.) “Based on this 21 valuation[,] Harris and Bergstein represented the value of the CFC Stock at a value of 22 approximately $2,500,000.” (Id.) Relatedly, “[o]n April 22, 2017, during a telephone 23 conversation, Bergstein and Harris presented to Fischler and Kapel what was 24 represented to be FPI-prepared financial statements for CCH that confirmed this 25 valuation and contained additional representations concerning the profitability of 26 CCH’s wholly owned subsidiary, Biozone Laboratories, Inc. (‘Biozone’).” (Id. ¶ 151.) 27 On May 12, 2017, Defendants formed CCH Acquisition Group, LLC (“CAG”) 28 to “spin off the stock or assets of CCH.” (Id. ¶ 169.) Plaintiffs allege that on May 31, 1 2017 email, Bergstein emailed Plaintiffs documents regarding CAG and stated, “CCH 2 has a very strong balance sheet with $21 Million in assets and $2.8 Million in 3 liabilities.” (Id. ¶¶ 172, 241, 262, 277, 296, 315.) 4 Plaintiffs allege that all of these representations about CCH’s assets were false. 5 To support falsity, Plaintiffs allege, over and over, that “[i]n June 2018[,] an 6 independently issued asset appraisal of CCH reflected CCH [sic] liquidated asset 7 value of less than $2,000,000, and thus CCH was essentially worthless due to third 8 party financial obligations that exceeded the asset liquidation value.” (Id. ¶¶ 154, 178, 9 187, 226, 243, 264, 278, 297, 316.) 10 Based on these alleged misrepresentations, Plaintiffs claim they were 11 fraudulently induced to enter various transactions, as detailed below. 12 1. CFC Asset Purchase 13 On April 27, 2017, the initial purchase of CFC’s assets was rescinded. (Id. 14 ¶ 140.) Then, on April 28, 2017, the parties entered into a final Asset Purchase 15 Agreement (“APA”), whereby FPI purchased the Flavor Business assets and CCH 16 purchased the Turn-key Business assets, again. (See id. ¶¶ 141–42.) In exchange for 17 the Turn-key Business, CCH issued a 22% membership interest in CCH (“CCH 18 Stock”) to Fischler and Kapel, who contributed the stock to FKH. (Id. ¶¶ 144–45.) 19 Plaintiffs allege that they would not have entered into the APA if they had known the 20 “true financial status of Biozone and CCH.” (Id. ¶ 233.) Consequently, with their 21 third claim, Plaintiffs seek damages worth “$2,500,000, which amount represents the 22 value of the CCH Stock received by Plaintiffs as partial consideration under the 23 [APA].” (Id. ¶ 234.)3 24 25 26

3 In their third claim, Plaintiffs also tack on a claim for damages in the amount of “$535,000 for 27 accounts payable operating expenses that [FPI] was obligated to pay, but that were instead paid by 28 Fischler and Kapel.” (SAC ¶ 235.) Allegedly, “Bergstein and Harris repeatedly promised that this amount would be reimbursed[,] but it never was.” (Id. ¶ 147.) 1 2. Biozone Employment Agreements 2 On July 1, 2017, Fischler and Kapel agreed to be at-will employees with 3 Biozone (“Biozone Employment Agreements”). (Id. ¶¶ 188–90.) The Biozone 4 Employment Agreements provided lower base compensations than Fischler and Kapel 5 normally received, plus a bonus structure based on CAG’s earnings. (Id. ¶¶ 189–90.) 6 Plaintiffs allege that they would not have agreed to the Biozone Employment 7 Agreements had Defendants been honest about CCH’s and Biozone’s financials. (Id. 8 ¶ 250.) Fischler and Kapel claim they would have respectively earned $233,333 and 9 $87,500 more in salaries if they had not been fraudulently induced into the 10 agreements. (Id. ¶¶ 251–52.) 11 3. Unit Purchase Agreement and Individual CAG Investments 12 As mentioned, Defendants formed CAG to “spinoff” the stock or assets of 13 CCH. (Id. ¶ 169.) Plaintiffs allege, upon information and belief, that FPI transferred 14 its interest in CCH to CAG “as part of a large-scale plan to transfer all stock in CCH 15 to CAG, and reduce FPI’s ownership by soliciting additional investors and redeeming 16 its shares in CAG (the ‘CCH Spinoff’).” (Id. ¶ 170.) Allegedly in reliance on 17 Defendants’ fraudulent representations about CCH, FKH transferred its interest in 18 CCH to CAG, in exchange for an interest in CAG (the “Unit Purchase Agreement”). 19 (Id. ¶ 182.) Similarly, “Kapel and Fischler also invested an additional $750,000 in 20 [CAG].” (Id. ¶¶ 16, 185, 284, 287, 320, 325.) But had Plaintiffs been aware of the 21 true financial status of CAG and its subsidiaries, they would not have invested in 22 CAG, either through FKH or individually. (Id. ¶¶ 184, 186, 286, 305, 324.) 23 C. Causes of Action 24 Based on the above, Plaintiffs assert the following claims against Defendants in 25 the SAC: (1) fraudulent inducement of the CFC Acquisition; (3) fraudulent 26 inducement of the CFC Asset Sale;4 (4) fraudulent inducement of the Biozone 27

28 4 Plaintiffs purposely omit a second cause of action, as the Court previously dismissed Plaintiffs’ second claim with prejudice. (See SAC at 34.) 1 Agreements; (5) fraudulent inducement of the Unit Purchase Agreement (i.e., FKH’s 2 investment in CAG); (6) fraudulent inducement of the CAG Investment by Fischler 3 and Kapel; and (7–9) securities fraud under 17 C.F.R. § 240.10b-5. (Id. ¶¶ 207–341.) 4 III. MOTION TO DISMISS 5 First, the Court considers Defendants’ Motion to Dismiss the SAC. 6 A. Legal Standard 7 Rule 12(b)(6) provides for dismissal of a complaint for lack of a cognizable 8 legal theory or insufficient facts pleaded to support an otherwise cognizable legal 9 theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). A 10 complaint need only satisfy the minimal notice pleading requirements of 11 Rule 8(a)(2)—a short and plain statement of the claim. Porter v. Jones, 319 F.3d 483, 12 494 (9th Cir. 2003). But factual “allegations must be enough to raise a right to relief 13 above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). 14 That is, the complaint must “contain sufficient factual matter, accepted as true, to state 15 a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 16 (2009) (internal quotation marks omitted). Testing the plausibility standard is a 17 “context-specific task that requires the reviewing court to draw on its judicial 18 experience and common sense.” Id. at 679. A court is generally limited to the 19 pleadings on a motion to dismiss and must construe all “factual allegations set forth in 20 the complaint . . . as true and . . . in the light most favorable” to the plaintiff. Lee, 21 250 F.3d at 679. However, a court need not blindly accept conclusory allegations, 22 unwarranted deductions of fact, or unreasonable inferences. Sprewell v. Golden State 23 Warriors, 266 F.3d 979, 988 (9th Cir. 2001). 24 B. Discussion 25 Previously, the Court dismissed Plaintiffs’ claims for failure to meet Rule 9(b)’s 26 heightened pleading standard applicable to claims for fraud and securities fraud. (See 27 Prior Order 20.) Now, Defendants challenge the SAC largely on the same basis, that 28 Plaintiffs fail to satisfy the heightened pleading requirements. 1 To plead a claim for fraudulent inducement, a plaintiff must allege the 2 defendant made a misrepresentation with knowledge of its falsity, intending to induce 3 Plaintiffs’ reliance, which Plaintiff then justifiably relied upon, resulting in damages. 4 Lazar v. Superior Court, 12 Cal. 4th 631, 638 (1996). Further, “where a complaint 5 includes allegations of fraud, [Rule] 9(b) requires more specificity including an 6 account of the ‘time, place, and specific content of the false representations as well as 7 the identities of the parties to the misrepresentations.’” Swartz v. KPMG LLP, 8 476 F.3d 756, 764 (9th Cir. 2007) (quoting Edwards v. Marin Park, Inc., 356 F.3d 9 1058, 1066 (9th Cir. 2004)). Plaintiffs must set forth “what is false or misleading 10 about the purportedly fraudulent statement, and why it is false.” Salameh v. Tarsadia 11 Hotel, 726 F.3d 1124, 1133 (9th Cir. 2013). 12 With these principles in mind, the Court considers Defendants’ arguments 13 against Plaintiffs’ claims, in turn. 14 1. Fraudulent Inducement of the CFC Acquisition (Claim One) 15 With respect to claim one, the Court previously identified several deficiencies 16 in Plaintiffs’ allegations, stating Plaintiffs failed to plead the “when,” “where,” 17 “what,” and “what was false or misleading . . . and why it is false.” (Prior Order 18 11–12.) Now, in their SAC, Plaintiffs include some additional details. (See SAC 19 ¶¶ 38–39, 41–43, 112–13.) In particular, Plaintiffs allege that over the course of three 20 meetings in April, May, and June 2015, “Harris and Bergstein both represented to 21 Fischler that FPI was interested in development of the Turn-key Business and wished 22 to maximize the revenues (and therefore the EBITDA) of CFC through the creation 23 and utilization of the Ohio Beverage Line.” (Id. ¶¶ 90, 211.) 24 Despite having more specificity on amendment, Plaintiffs’ first claim for fraud 25 still falls short because “[g]enerally, fraudulent misrepresentations must take the form 26 of present or past facts, rather than promises, predictions, or opinions about future 27 conduct.” Terstate Restoration, LLC v. Seaman, No. SACV 13-00706 DOC (RNBx), 28 2014 WL 12569347, at *9 (C.D. Cal. July 9, 2014) (citing 5 Witkin, Summ. of Cal. 1 Law § 774 (10th ed. 2005)); see also Graham v. Bank of Am., N.A., 226 Cal. App. 4th 2 594, 607 (2014) (“It is hornbook law that an actionable misrepresentation must be 3 made about past or existing facts; statements regarding future events are merely 4 deemed opinions.”). 5 Here, the allegations are that Defendants represented a desire to maximize 6 CFC’s revenues by planning to utilize FPI’s Ohio Beverage Line in a profitable 7 manner. (See SAC ¶¶ 90, 211.) These allegations amount to nothing more than 8 “promises, predictions, or opinions about future conduct.” Terstate Restoration, 9 2014 WL 12569347, at *9. To be sure, “[a] promise made without any intention of 10 performing it constitutes actual fraud and deceit.” Graham v. L.A. First Nat. Tr. & 11 Sav. Bank, 3 Cal. 2d 37, 42 (1935); (see Opp’n MTD 5). But Plaintiffs do not allege 12 that Defendants promised increased revenue for CFC—the allegations are that 13 Defendants “wished to maximize” those values. Moreover, Plaintiffs’ own allegations 14 undercut their theory that Defendants were lying when they expressed a desire to 15 maximize CFC’s revenues by way of the Ohio Beverage Line. Rather, it appears that 16 Defendants did create and attempt to utilize the Ohio Beverage Line, but 17 “[u]nfortunately, due to quality and planning issues with the Ohio Beverage Line, only 18 a fraction of this production occurred.” (SAC ¶ 126.) For all these reasons, Plaintiffs 19 fail to allege an actionable misrepresentation upon which to base their Claim One for 20 fraudulent inducement of the CFC Acquisition. Accordingly, this claim is 21 DISMISSED. 22 2. Fraudulent Inducement of the CFC Asset Sale (Claim Three) 23 The Court previously dismissed Plaintiffs’ third claim for failure to meet the 24 heightened pleading standard of Rule 9(b), and for failure to adequately allege that a 25 false representation was made regarding the APA. (Prior Order 13.) In the SAC, 26 Plaintiffs have alleged some more details. They allege that, “on March 26, 2017 and 27 April 8, 2015 [sic], Harris and Bergstein stated in telephone calls between themselves, 28 Fischler and Kapel that CCH had a $20,000,000 asset balance sheet value plus 1 prospective business from Muscle Pharm over a three year period at $4,5000,000 [sic] 2 that was guaranteed,” and “[b]ased on this valuation Harris and Bergstein represented 3 the value of the CFC Stock at a value of approximately $2,500,000.” (SAC ¶¶ 150, 4 223.) Then, “[o]n April 22, 2017, during a telephone call, Bergstein and Harris 5 presented to Fischler and Kapel what they represented to be FPI-prepared financial 6 statements for CCH that confirmed this valuation and contained additional 7 representations concerning the profitability of . . . Biozone.” (Id. ¶¶ 151, 224.) Now, 8 Defendants challenge this third claim on several grounds. 9 a. Actionable Misrepresentation / Justifiable Reliance 10 Defendants argue that Plaintiffs fail to allege an actionable misrepresentation 11 because a statement of value is an opinion, not a statement of fact. (MTD 10 (citing 12 Neu-Visions Sports, Inc. v. Soren/McAdam/Bartells, 86 Cal. App. 4th 303 (2000)).) 13 But Defendants’ reliance on Neu-Visions Sports is misplaced, as that court also 14 explained that “when a party possesses or holds itself out as possessing superior 15 knowledge or special information . . . and a plaintiff is so situated that it may 16 reasonably rely on such supposed knowledge . . . the defendant’s representation may 17 be treated as one of material fact.” Id. at 307 (quoting Billy v. Arthur Young & Co., 3 18 Cal. 4th 370, 408 (1992)). Here, Plaintiffs allege that “FPI continued to maintain the 19 books and records for CCH and handle day-to-day accounting activities,” and that 20 “Bergstein was the point-person between FPI and CCH during this period.” (SAC 21 ¶ 157.) They allege that Harris was the CEO of FPI and the President of CCH. (See 22 id. ¶¶ 34, 51, 146.) Based on these roles, it would have been reasonable and 23 justifiable for Plaintiffs to rely on Defendants’ representations regarding CCH’s 24 finances.5 25 26 27

28 5 This also addresses Defendants’ argument regarding whether Plaintiffs fail to allege justifiable reliance regarding their third claim. 1 b. Falsity / Knowledge / Intent to Deceive 2 Defendants also argue that Plaintiffs fail to sufficiently allege falsity regarding 3 Defendants’ representations of CCH’s value. (MTD 12.) Essentially, Defendants 4 argue that Plaintiffs offer no facts to support falsity. (Id.) But the Court disagrees. 5 Plaintiffs allege that “[i]n June 2018[,] an independently issued asset appraisal of 6 CCH reflected CCH [sic] liquidated asset value of less than $2,000,000, and thus 7 CCH was essentially worthless due to third party financial obligations that exceeded 8 the asset liquidation value.” (Id. ¶¶ 153, 178, 187, 226, 243, 264, 278, 297, 316.) 9 Accepting this alleged fact as true, it is plausible to conclude that Defendants 10 misrepresented the value of CCH’s assets in 2017 when they represented CCH’s assets 11 at being valued around $21 million. Thus, although Plaintiffs only offer one particular 12 fact to support the inference, they adequately plead falsity with respect to the 13 representations of CCH’s asset value. 14 As for knowledge of falsity and intent to deceive, “Rule 9(b) does not require 15 more than general allegations regarding malice, intent, knowledge, and other 16 conditions of a person’s mind.” Scott v. Ariz. Ctr. for Hematology & Oncology PLC, 17 No. CV-16-03703-PHX-DGC, 2018 WL 1210903, at *3 (D. Ariz. Mar. 8, 2018) 18 (citing Fed. R. Civ. P. 9(b)); see also Neubronner v. Milken, 6 F.3d 666, 669 n.4 19 (9th Cir. 1993) (same). Here, Plaintiffs allege generally that Defendants knew the 20 representations about CCH’s assets were false, and that Defendants intended for the 21 misrepresentations to deceive Plaintiffs. At this pleading stage, these allegations are 22 sufficient. See Fed. R. Civ. P. 9(b). 23 c. Economic Loss Rule 24 Lastly with respect to this third claim, Defendants argue that Plaintiffs’ tacked- 25 on claim for $535,000 is barred by the economic loss doctrine. (MTD 14.) 26 Defendants are correct. “The economic loss rule requires a [plaintiff] to recover in 27 contract for purely economic loss due to disappointed expectations, unless he can 28 demonstrate harm above and beyond a broken contractual promise.” Robinson 1 Helicopter Co., Inc. v. Dana Corp., 34 Cal. 4th 979, 988 (2004) (emphasis added) 2 (“Quite simply, the economic loss rule prevents the law of contract and the law of tort 3 from dissolving one into the other.” (internal quotation marks and brackets omitted)); 4 accord ChromaDex, Inc. v. Elysium Health, Inc., 301 F. Supp. 3d 963, 970 (C.D. Cal. 5 2017) (holding economic loss rule applicable where “[plaintiff’s] injury is simply 6 economic harm resulting from the contract—namely, that [defendant] owes it money 7 that [defendant] will not pay”). 8 Here, Plaintiffs seek damages in the amount of “$535,000 for accounts payable 9 operating expenses that [FPI] was obligated to pay, but that were instead paid by 10 Fischler and Kapel.” (SAC ¶ 235.) Allegedly, “Bergstein and Harris repeatedly 11 promised that this amount would be reimbursed[,] but it never was.” (Id. ¶ 147.) 12 Plaintiffs do not allege harm above and beyond a broken promise to pay them, so to 13 the extent Plaintiffs’ third claim seeks reimbursement of the allegedly owed $535,000, 14 it is DISMISSED with prejudice, as an amendment could not overcome the 15 economic loss doctrine. 16 That said, because Defendants do not raise valid grounds for dismissing the 17 remainder of the third claim, Defendants’ Motion with respect to this claim is 18 otherwise DENIED. 19 3. Fraudulent Inducement of the Biozone Agreements (Claim Four), 20 FKH’s Investment in CAG (Claim Five), and the Individuals’ Investment in CAG (Claim Six) 21 22 Plaintiffs reassert claims four, five, and six, which all stem from the same 23 alleged misrepresentation that serves as the basis for claim three. (SAC ¶¶ 236–87.) 24 Plaintiffs allege that they would not have agreed to be Biozone employees for less pay, 25 nor would they have invested in CAG (through FKH or individually), but for the fact 26 that Defendants misrepresented CCH as having $21 million in assets. (Id. ¶¶ 184, 27 186, 233, 250, 286, 305, 324.) 28 1 Defendants raise the same arguments against these claims as they did against 2 claim three—namely, that Plaintiffs fail to plead (1) actionable misrepresentation, 3 (2) falsity, knowledge, or intent to deceive, and (3) justifiable reliance. (MTD 14–19.) 4 For the reasons already discussed above, Defendants’ arguments fail. (See supra 5 Part III.B.2.) Accordingly, with respect to claims four, five, and six, Defendants’ 6 Motion is DENIED. 7 4. Rule 10b-5(b) Securities Fraud Resulting in CAG Investments (Claims Seven and Eight) 8 9 Plaintiffs reassert claims seven and eight, for securities fraud related to 10 investments in CAG by FKH and the Individuals, respectively. (SAC ¶¶ 288–325.) 11 To properly plead a claim under Rule 10b-5(b), a plaintiff must allege the defendant 12 made a material misrepresentation with intent to defraud, that was connected to the 13 purchase or sale of a security, that was relied upon by Plaintiffs, thereby causing 14 Plaintiffs an economic loss. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42 15 (2005); see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5(b) (making it unlawful, in 16 connection with the purchase or sale of any security, “[t]o make any untrue statement 17 of a material fact or to omit to state a material fact necessary in order to make the 18 statements made . . . not misleading”). 19 Here, Plaintiffs allege that Defendants misrepresented the value of CCH’s 20 assets with an intent to deceive Plaintiffs into investing in CAG, which Plaintiffs did 21 to their detriment in reliance on the misrepresentations. Notably, Plaintiffs’ seventh 22 and eighth claims also stem from the same alleged misrepresentation that serves as the 23 basis for claims three, four, five, and six. And with respect to claims seven and eight, 24 Defendants raise the same arguments already discussed above—that Plaintiffs fail to 25 allege an actionable misrepresentation, scienter, falsity, or justifiable reliance. 26 (MTD 21–24.) And again, for reasons already explained, Defendants’ arguments fall 27 short. (See supra Part III.B.2.) 28 1 Defendants also seem to argue that securities law does not apply here because 2 the alleged misrepresentation was not made in connection with the sale or purchase of 3 a security. (MTD 20 (“Federal securities laws ‘must not be construed so broadly as to 4 convert every common-law fraud that happens to involve securities into a violation of 5 § 10(b).’” (quoting S.E.C. v. Zandford, 535 U.S. 813, 820 (2002))).) But that 6 argument is not convincing in a case like this, where Plaintiffs allege the preparation 7 and dissemination of fraudulent financial information to potential investors, including 8 Plaintiffs, in order to induce investments in CAG. (See SAC ¶¶ 288–341.) “[A] 9 security is an instrument in which there is ‘common trading.’” Marine Bank v. 10 Weaver, 455 U.S. 551, 560 (1982). The transactions detailed here are not the type of 11 “unique agreement[s], negotiated one-on-one by the parties” that have been held to be 12 “not a security.” See id. at 559–60 (“[U]nusual instruments found to constitute 13 securities in prior cases involved offers to a number of potential investors, not a 14 private transaction as in this case.”). 15 For these reasons, with respect to claims seven and eight, Defendants’ Motion is 16 DENIED. 17 5. Rule 10b-5(a) and (c) Securities Fraud Resulting in CFC Acquisition (Claim Nine) 18 19 Plaintiffs reassert claim nine, for securities fraud based on the alleged scheme 20 that Defendants manipulated CFC’s revenues to obtain a lower purchase price in the 21 CFC Acquisition. (SAC ¶¶ 326–41.) Defendants raise several challenges to this 22 claim, but the Court need not address all of those arguments because this claim, like 23 Plaintiffs’ first claim, stems from the alleged misrepresentations that Defendants 24 wished to maximize CFC’s revenues. (See id. ¶ 334.) As explained above, Plaintiffs 25 fail to allege an actionable misrepresentation upon which to base this claim. (See 26 supra Part III.B.1.) Accordingly, for reasons already discussed above, this claim is 27 also DISMISSED. 28 1 IV. LEAVE TO AMEND 2 The question remains whether to grant leave to amend claims one and nine, 3 which have been dismissed. Plaintiffs have also moved for leave to file a Third 4 Amended Complaint (“TAC”). (See Mot. Amend.) Ordinarily, “[t]he Court should 5 freely give leave when justice so requires.” Fed. R. Civ. P. 15(a)(2). Reasons to deny 6 leave to amend include “bad faith, undue delay, prejudice to the opposing party, 7 and/or futility.” Serra v. Lappin, 600 F.3d 1191, 1200 (9th Cir. 2010) 8 (quoting William O. Gilly Enters. v. Atl. Richfield Co., 588 F.3d 659, 669 n.8 (9th Cir. 9 2009)); see also Foman v. Davis, 371 U.S. 178, 182 (1962). 10 A. Dismissed Claims 11 First, the Court finds that leave to amend claims one and nine would be futile. 12 “[W]hen a district court has already granted a plaintiff leave to amend, its discretion in 13 deciding subsequent motions to amend is ‘particularly broad.’” Chodos v. W. Publ’g 14 Co., 292 F.3d 992, 1003 (9th Cir. 2002); see also Zucco Partners, LLC v. Digimarc 15 Corp., 552 F.3d 981, 1007 (9th Cir. 2009) (failure to correct previously noted 16 deficiencies is “a strong indication that the plaintiffs have no additional facts to 17 plead”). Here, Plaintiffs have had enough opportunity to bolster their allegations for 18 claims one and nine, and it seems clear that the alleged misrepresentations underlying 19 these claims—that Defendants wished and intended to maximize CFC’s revenues— 20 are simply not actionable as fraud. Accordingly, leave to amend these dismissed 21 claims is DENIED. 22 B. Plaintiffs’ Motion for Leave to Amend 23 With their Motion, Plaintiffs seek leave to allege that Defendants tricked them 24 into believing FPI would assume liability for the Employment Agreements under the 25 APA. (Mot. Amend 1–3.) Plaintiffs argue that such allegations “lead[] to yet more 26 bases for Plaintiffs to assert a claim for fraudulent inducement of the [APA].” (Id. 27 at 2.) Alternatively, Plaintiffs want to assert two additional claims against Defendants 28 1 for breach of contract, based on alleged breaches of the APA and the Employment 2 Agreements, respectively. (Id. at 2–3.) 3 Some procedural history is relevant here. In the First Amended Complaint 4 (“FAC”), Plaintiffs alleged that Fischler and Kapel each entered into non-terminable, 5 seven-year employment agreements (the “Employment Agreements”) with their own 6 company, Creative Flavor Concepts, Inc. (“CFC”). (FAC ¶¶ 218–220.) Significantly, 7 Plaintiffs alleged that “FPI assumed the Employment Agreements . . . around January 8 2017 as part of the sale of CFC’s assets [“Asset Purchase Agreement” or 9 “APA”] . . . and FPI, either directly or through subsidiaries, compensated Fischler and 10 Kapel according to the terms of the Employment Agreements until June 2017, at 11 which time FPI ceased paying altogether.” (Id. ¶ 223.) According to Plaintiffs, “[t]he 12 Employment Agreements were never terminated[,] and therefore FPI continues to be 13 liable to pay Fischler and Kapel the contracted amounts.” (Id. ¶ 224.) 14 Based on those allegations, Plaintiffs brought a claim for fraudulent inducement 15 of the Employment Agreements. (Id. ¶¶ 217–231.) On Defendants’ previous motion 16 to dismiss the FAC, the Court dismissed that claim, with prejudice, based on the 17 economic loss doctrine. (Prior Order 14–15.) The Court explained that Plaintiffs’ 18 claim for fraudulent inducement of the Employment Agreements was barred because 19 it was “based solely on FPI’s purported promise to pay Plaintiffs pursuant to the terms 20 of the . . . Employment Agreements, and FPI’s subsequent failure to pay Plaintiffs the 21 amounts owed under those agreements.” (Id. at 14.) 22 Meanwhile, because the Employment Agreements contained arbitration clauses, 23 Plaintiffs pursued breach of contract claims against Defendants in a parallel 24 arbitration. (See FAC ¶¶ 65–66.) On May 17, 2021, the Arbitrator issued an order 25 denying Plaintiffs’ motion to compel arbitration. (Decl. of David K. Bowles ¶ 3, ECF 26 No. 69.) “After study of the Opening briefs and Oppositions, the declarations and 27 exhibits in support of the briefs, after study of the cases cited, and after hearing 28 arguments of Counsel,” the Arbitrator found that FPI could not be forced to arbitrate 1 claims for breach of the Employment Agreements because Plaintiffs did not 2 “demonstrate that FPI agreed to arbitrate the disputes by assuming the [Employment] 3 Agreements, accepting the assignment of the [Employment] Agreements, or taking an 4 affirmative, express action to become a party to the [Employment] Agreements.” 5 (Arb. Order 1, 7, ECF No. 69-1.) 6 Now, Plaintiffs want to amend claim four to allege an extra basis for fraud in 7 the inducement of the APA, and they want to add two claims for breach of contract 8 based on the APA and the Employment Agreements, respectively. (See Mot. Amend.) 9 1. Proposed Breach of Contract Claims 10 Leave to add the proposed breach of contract claims is not appropriate because 11 such amendment would be futile. The Court can rely on the APA to the extent it is 12 incorporated by reference in Plaintiffs’ complaint and proposed amendments. See 13 Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006) (“A court may consider evidence 14 on which the complaint ‘necessarily relies’ if: (1) the complaint refers to the 15 document; (2) the document is central to the plaintiff’s claim; and (3) no party 16 questions the authenticity of the copy attached to the 12(b)(6) motion.”); see also Atel 17 Fin. Corp. v. Quaker Coal Co., 321 F.3d 924, 925–26 (9th Cir. 2003) (“Under 18 California law, the interpretation of contract language is a question of law.”). 19 Under the terms of the APA, it is clear that FPI did not assume the Employment 20 Agreements. The APA defines FPI as the “Flavor Buyer” and another entity, non- 21 party Creative Concepts Holdings, Inc. (“CCH”), as the “Buyer.” (See APA at 22 Preamble, ECF No. 67-4.) It also makes clear that the Employment Agreements were 23 to be “executed and delivered to the Buyer”—i.e., CCH, not FPI. (Id. § 10.1(e).) Yet 24 Plaintiffs seek to assert their breach of contract claims against FPI, not CCH, based 25 exclusively on a theory that the APA’s written terms obligated FPI to assume the 26 Employment Agreements. (See Prop. TAC ¶¶ 374–94.) Because it is clear the APA 27 did not create such contractual liability for FPI, Plaintiffs’ proposed breach of contract 28 1 claims are plainly meritless, and the proposed amendments would be futile. Thus, 2 leave to add such claims is DENIED. See Serra, 600 F.3d at 1200. 3 2. No Leave to Amend Claim Four 4 As for the extra allegations regarding the claim for fraudulent inducement of the 5 APA, amendment would likewise be futile because reliance on a representation that 6 FPI would assume liability for the Employment Agreements under the APA would 7 have been unjustifiable. “An essential element in recovery for [fraud or] deceit is 8 proof of the plaintiff’s justifiable reliance on the defendant’s fraudulent 9 representations.” City Sols., Inc. v. Clear Channel Commc’ns, 365 F.3d 835, 840 10 (9th Cir. 2004). “[W]hether a party’s reliance was justified may be decided as a 11 matter of law if reasonable minds can come to only one conclusion based on the 12 facts.” Id. “There cannot be a valid express contract and an implied contract, each 13 embracing the same subject, but requiring different results.” Agosta v. Astor, 120 Cal. 14 App. 4th 596, 604 (2004) (quoting Starzynski v. Capital Public Radio, Inc., 88 Cal. 15 App. 4th 33, 38 (2001)). In such a case, “[t]he express term is controlling even if it is 16 not contained in an integrated employment contract.” Id. (“[A]n express written 17 agreement, signed by an employee, cannot be overcome by proof of an implied 18 contrary understanding.” (emphasis omitted)). 19 Here, the express terms of the APA are clear—FPI did not assume the 20 Employment Agreements under the written terms of the APA, and no reasonable mind 21 could conclude otherwise. (See supra); APA § 10.1(e). Furthermore, the APA 22 contained an integration clause. (See APA § 16.5 (“This [APA] constitutes the entire 23 agreement between the parties . . . and supersedes all prior and contemporaneous 24 agreements with respect to the subject matter hereof, whether written or oral, whether 25 express or implied.”). Consequently, it would have been “simply not justifiable” for 26 Plaintiffs to rely on oral representations that FPI would assume the Employment 27 Agreements under the APA when the express terms of the APA say otherwise. See 28 1 || Agosta, 120 Cal. App. 4th at 604. As no amendment could overcome this deficiency, 2 || leave to amend claim four is also DENIED. See Serra, 600 F.3d at 1200. 3 V. CONCLUSION 4 In summary, Defendants’ Motion to Dismiss the SAC is GRANTED in part and DENIED in part. (ECF 60.) Plaintiffs’ claims one and nine are 6|| DISMISSED with prejudice. To the extent Plaintiffs’ claim three demands 7 || rermbursement of $535,000 based on Defendants’ promises to pay, the claim is 8 | DISMISSED with prejudice. As to the remainder of Plaintiffs’ claims (including the 9 || remainder of claim three), Defendants’ Motion is DENIED. Additionally, Plaintiffs’ 10 || Motion for Leave to Amend is DENIED. (ECF No. 65.) Defendants shall file their 11 || Answer(s) to the SAC pursuant to Rule 12(a)(4)(A). 12 13 IT IS SO ORDERED. 14 15 July 12, 2021 16 .

18 OTIS D. W RIGHT, II 19 UNITED STATES DISTRICT JUDGE

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