Abe v. AFCH, Inc.

• Decision Date: 18 January 2022
• Docket Number: 2:20-CV-08193-ODW (PVCx)
• Parties: MICHAEL ABE, an individual, Plaintiff, v. AFCH, INC., a California corporation; MICHAEL AMIRI, an individual; BRANDT MORI, an individual; KANGKYU CHAD SHIN, an individual; and DOES 1-10, inclusive, Defendants.
• Court: U.S. District Court — Central District of California

MICHAEL ABE, an individual, Plaintiff,
v.
AFCH, INC., a California corporation; MICHAEL AMIRI, an individual; BRANDT MORI, an individual; KANGKYU CHAD SHIN, an individual; and DOES 1-10, inclusive, Defendants.

No. 2:20-CV-08193-ODW (PVCx)

United States District Court, C.D. California

January 18, 2022

ORDER GRANTING MOTION TO DISMISS [40]

OTIS D. WRIGHT, II, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

Plaintiff Michael Abe brings this lawsuit against Defendants AFCH, Inc. and Michael Amiri for federal securities violations. (See First Amended Compl. (“FAC”), ECF No. 30.) Defendants move to dismiss Abe's FAC under Federal Rule of Civil Procedure (“Rule”) 12(b)(6). (Mot. Dismiss (“Motion” or “Mot.”), ECF No. 40.) The Motion is fully briefed. (See Opp'n, ECF No. 48; Reply, ECF No. 55.) For the reasons that follow, the Court GRANTS Defendants' Motion.^[1]

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II. BACKGROUND

AFCH is a California corporation in the fashion industry and Amiri is its Chief Executive Officer and Creative Director. (See FAC ¶¶ 10-12.) Abe, a veteran fashion designer, partnered with Amiri to help expand AFCH's business. (Id. ¶¶ 25-26.) On January 1, 2017, Abe signed an employment agreement with AFCH, and the parties executed the Restricted Stock Grant Agreement, which awarded Abe 5% of AFCH stock, or 5, 882 shares (“Grant Agreement”). (Id. ¶¶ 29-30, Ex. 1 (“Grant Agreement”), ECF No. 30-1.)

Later that year, AFCH retained Rothschild & Co. to value the company in anticipation of the sale of, or an investment in, AFCH. (FAC ¶¶ 33-34.) Rothschild valued AFCH at approximately $100 million (“Rothschild Valuation”).^[2] (Id. ¶ 43.) During this time, the fashion group Only the Brave (“OTB”) was negotiating an investment in AFCH (“OTB Deal”). (Id. ¶¶ 1, 35-37.) In September 2017, AFCH reached a tentative agreement with OTB for an investment transaction premised on the $100 million valuation of AFCH. (Id. ¶¶ 44-46.) This tentative agreement fell through but negotiations were renewed in January 2018, with the investment again premised on a $100 million valuation of AFCH. (Id. ¶¶ 54, 56.)

In late February 2018, Abe resigned from AFCH and, pursuant to the terms of the Grant Agreement, AFCH chose to repurchase half of Abe's equity interest, or 2.5% of AFCH stock (i.e., 2, 941 shares). (Id. ¶¶ 60-61.) The Grant Agreement provided that the purchase price of Abe's shares would be equal to the “fair market value of the shares as of the end of the month immediately preceding the Triggering Event.” (Grant Agreement § 8(b).) Accordingly, the valuation date (“Valuation Date”) for Abe's 2, 941 shares was January 31, 2018. (FAC ¶ 63.) Based on the recent Rothschild $100 million valuation, Abe believed that his 2.5% was worth $2.5 million. (Id. ¶ 64.)

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To value Abe's shares for the repurchase, AFCH relied on a valuation by Frank, Rimerman + Co. LLP (the “FRC Valuation”), even though Rothschild had affirmed its $100 million valuation within days of the Valuation Date. (Id. ¶¶ 65-66.) The FRC Valuation had been performed to comply with Internal Revenue Code 409A and not for the specific purpose of valuing Abe's shares. (Id. ¶¶ 67-68.) FRC valued AFCH at $28, 300, 000 as of December 31, 2017. (Id. ¶ 76.) This was based on a discounted the share price due to lack of share marketability and resulted in Abe's 2.5% equity being worth $429, 033.08 instead of the $2.5 million he had anticipated. (Id. ¶ 69.)

Abe disputed the FRC Valuation and obtained an independent appraisal, the “Vantage Valuation.” (Id. ¶¶ 80, 84.) To help facilitate this valuation, AFCH provided Abe with the company's March 2018 Budget, which had a Projected 2018 Revenue of $31.252 million. (Id. ¶ 79.) By comparison, the April 2018 Budget projected a Net Revenue of $38 million. (Id. ¶ 81.) Although AFCH had already updated the April 2018 Budget, it disclosed only the March 2018 version to Abe. (Id. ¶¶ 81-82.) When Abe requested “other ‘budgets'/'forecasts' for 2018 in addition to what” AFCH had disclosed, AFCH's general counsel responded that the March 2018 Budget was “the most recent one that had been prepared.” (Id. ¶¶ 84-85.) Based on the March 2018 Budget, Vantage valued AFCH at $66, 790, 000 as of January 31, 2018, with Abe's 2.5% equity worth $1, 230, 186. (Id. ¶ 94.)

Rather than negotiate with Abe regarding the differing valuations, Abe alleges that AFCH “instead hatched a fraudulent scheme to coerce Abe to sell all his shares back to AFCH . . . at far below their fair market value” by accusing Abe of trade secret violations and misconduct. (Id. ¶¶ 96-98 (emphasis added).) Abe ultimately agreed to sell back his entire 5% stake of 5, 882 shares to AFCH. (Id. ¶¶ 116-17.) Accordingly, on August 20, 2018, the parties executed a new “Stock Purchase Agreement” (“SPA”). (Id. ¶ 118-19, Ex. 2 (“SPA”), ECF No. 30-2.) Under the SPA, AFCH would purchase all of Abe's AFCH stock at the greater of: (a) $1, 000, 000 or

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(b) the fair market value of the shares as determined, in good faith, by an appraiser in accordance with the Grant Agreement. (Id.)

During this time, and prior to entering the SPA, AFCH separately commissioned the “Sorbus Valuation” to appraise Abe's shares. (FAC ¶ 99.) The Sorbus Valuation was based on the March 2018 Budget and AFCH's FRC Valuation, but AFCH did not disclose to Sorbus Abe's Vantage Valuation or any documents related to the Rothschild Valuations or ongoing OTB negotiations. (Id. ¶¶ 100-01.) Sorbus valued AFCH at $35.9 million and concluded that, as of January 31, 2018, Abe's 5, 882 shares were worth $1.07 million. (Id. ¶ 104.)

Pursuant to the Grant Agreement and SPA, AFCH selected an independent appraiser to determine the fair market value of Abe's shares-Armanino, LLP. (Id. ¶¶ 128-29.) AFCH provided Armanino with the March 2018 Budget and financials that reflected a 2018 Projected Revenue of $31.252 million. (Id. ¶¶ 132-34.) AFCH also provided the FRC Valuation ($28.3 million) and the Sorbus Valuation ($35.9 million). (Id. ¶ 139.) AFCH did not disclose to Armanino the Vantage Valuation ($66.7 million), or any information or documents related to Rothschild Valuations ($100 million). (Id.) AFCH also did not disclose that it had been in negotiations with OTB since the summer of 2017 and that the OTB Term Sheet reflected a $100 million valuation. (Id. ¶ 141.) Despite this, Amiri signed an express affirmation on behalf of AFCH, representing that AFCH had provided Armanino with all information material to their valuation of AFCH. (Id. ¶ 156.) Abe alleges that “[t]his representation was patently false.” (Id.)

Armanino valued AFCH at $31.7 million and determined that, as of January 31, 2018, Abe's 5, 882 shares had a fair market value of $950, 000. (Id. ¶¶ 151, 154.) On September 6, 2018, AFCH gave Abe a copy of the Armanino Valuation and shortly thereafter wired Abe $946, 850, which was the purported fair market value of Abe's 5% equity stake less half of the cost of the Armanino Valuation. (Id. ¶¶ 158-59.)

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The next year on June 3, 2019, AFCH and Amiri issued a press release announcing that OTB had acquired a minority stake in Amiri. (Id. ¶ 161.) In August 2019, Abe learned “from various sources” that OTB had paid $40 million for its minority stake in AFCH, implying at least a $100 million valuation of the company. (Id. ¶ 162.) Abe concluded that AFCH had used the Rothschild $100 million valuation and that AFCH had manipulated its financial information to reduce the purchase price of Abe's shares. (Id. ¶¶ 164-65.) Accordingly, in September 2019, Abe sent AFCH and Amiri a letter “expressing his concerns that the stock buyout had not been conducted in good faith.” (Id. ¶ 166.)

On September 8, 2020, Abe filed his Complaint in this action against AFCH and Amiri asserting two claims for federal securities violations. (Compl. ¶¶ 105-19, ECF No. 1.) On June 1, 2021, the Court granted Defendants' motion to dismiss the Complaint with leave to amend, finding that Abe's allegations lacked sufficient particularity and failed to adequately allege scienter. (Order Granting Mot. 8, 13.) The Court advised Abe that, to survive another Motion to Dismiss, he “must allege a strong, cogent, and compelling inference of scienter and plead facts with particularity beyond mere information and belief.” (Id. at 13.)

On June 21, 2021, Abe filed his First Amended Complaint (“FAC”) asserting the same two claims under the Securities Exchange Act: (1) violations of § 10(b) and Rule 10b-5 (against all Defendants); and (2) Control Person Liability under Section 20(a) (against only Amiri). (See FAC ¶¶ 167-92.)^[3] AFCH and Amiri now move to dismiss the FAC for failure to state a claim. (See Mot.)

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III. LEGAL STANDARD

A court may dismiss a complaint under Rule 12(b)(6) 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). To survive a dismissal motion, 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). The 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 “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted).

The determination of whether a complaint satisfies the plausibility standard is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. A court is generally limited to the pleadings and must construe all “factual allegations set forth in the complaint . . . as true and . . . in the light most favorable” to the plaintiff. Lee v. City of Los Angeles...