Carstarphen v. Milsner

• Decision Date: 23 January 2009
• Docket Number: No. 3:07-CV-542-ECR-RAM.,3:07-CV-542-ECR-RAM.
• Parties: John CARSTARPHEN, an individual, Plaintiff, v. Richard MILSNER, an individual and Does 1 through 10, inclusive, Defendants.
• Court: U.S. District Court — District of Nevada

594 F.Supp.2d 1201

John CARSTARPHEN, an individual, Plaintiff, v. Richard MILSNER, an individual and Does 1 through 10, inclusive, Defendants.

No. 3:07-CV-542-ECR-RAM.

United States District Court, D. Nevada, Reno.

January 23, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John Scott Russo, Patrick O. King, King & Russo, Ltd., Minden, NV, for Plaintiff.

Richard G. Hill, Law Office of Richard Hill, Reno, NV, for Defendants.

Order

EDWARD C. REED, JR., District Judge.

This case involves claims of breach of fiduciary duty brought by a minority shareholder against a director of a corporation. Plaintiff John Carstarphen ("Plaintiff") alleges that Defendant Richard Milsner ("Defendant"), a director of American Medflight, Inc. ("American Medflight"), breached his fiduciary duties in relation to certain transactions involving American Medflight stock, as well as certain business dealings between American Medflight and another company, Reno Flying Service, Inc. ("Reno Flying Service"), of which Mr. Milsner is majority shareholder.

Now before the Court is Defendant's Motion to Dismiss (# 14). Defendant argues that Plaintiff's first claim for relief fails to comply with the heightened pleading requirements of Fed.R.Civ.P. 9(b), and that Plaintiffs second claim for relief is barred by res judicata/claim preclusion.¹ Plaintiff has opposed (# 16) the motion, and Defendant has replied (# 18).

The motion is ripe, and we now rule on it.

I. Background

Plaintiff John Carstarphen has been the owner of a one-third share of American Medflight's issued stock since the company's founding in 1993. (First Amended Complaint ("FAC") ¶ 6(# 4).) In 1993, Defendant Richard Milsner also owned a onethird share in the company, with the remaining one-third share owned by John Dawson, who is not a party to this lawsuit. (Id.) Since 1993, Mr. Carstarphen, Mr. Milsner, and Mr. Dawson have comprised American Medflight's three-person Board of Directors. (Id.) Mr. Dawson is also the president of American Medflight. (Id.) American Medflight has an Employee Stock Option Plan² ("AMF ESOP"), the trustees of which are Mr. Milsner and Mr. Dawson. (Id.)

Mr. Milsner is the owner of ninety six and one-quarter percent of Reno Flying Service, which was incorporated in 1991. (Id. ¶ 7.) Mr. Dawson owns the remaining shares of Reno Flying Service. (Id.) In 1998, Mr. Dawson's one-third share of American Medflight stock was sold to Reno Flying Service. (Id. ¶ 14.) Thus, Mr. Milsner controlled two-thirds of American Medflight stock, one-third individually and one-third through his controlling interest in Reno Flying Service. (Id. ¶ 14.)

In 2005, AMF ESOP purchased both the one-third share of American Medflight owned by Mr. Milsner individually and the one-third share of American Medflight owned by Reno Flying Service at a price of $2310 per share. (Id. ¶ 16.) Mr. Carstarphen was invited to sell his one-third share to AMF ESOP at the same price, but only on the condition that Mr. Carstarphen dismiss certain other litigation he had pending in Nevada state court against Mr. Milsner and Mr. Dawson, among others. (Id. ¶ 15.) Mr. Carstarphen declined. (Id.)

Plaintiff's first claim for relief, alleging "breach of fiduciary duty and self dealing," arises out of these 2005 transactions involving the sale of American Medflight stock to AMF ESOP. At the time of the purchase of Mr. Milsner's and Reno Flying Service's shares in American Medflight, AMF ESOP did not have sufficient cash to pay the purchase price immediately. (Id.) The balance of the purchase price was financed via a promissory note. (Id.) The promissory note appeared on American Medflight's financial statements as a $3.4 million liability. (Id. ¶ 17.) With this liability, Mr. Carstarphen's shares were allegedly devalued from a market value of $2310 per share to approximately $400 per share, a loss of over $1.5 million in value. (Id. ¶ 17.) He argues that Mr. Milsner's role in implementing these transactions, which resulted in a loss for Mr. Carstarphen and a personal gain for Mr. Milsner, amounts to a breach of his fiduciary duties. (Id. ¶ 19-20.)

Plaintiff's second claim for relief arises out of certain business dealings between American Medflight and Reno Flying Service, which he alleges constitute breaches of Mr. Milsner's fiduciary duties. (Id. ¶ 23.) Specifically, Mr. Carstarphen objects to three categories of actions taken by American Medflight under the control of Mr. Milsner: (1) payment of a monthly "consulting fee" to Reno Flying Service, (2) leasing aircraft from Reno Flying Service instead of purchasing aircraft for American Medflight, and (3) using Reno Flying Service for repair of American Medflight airplanes instead of hiring inhouse maintenance personnel. (Id.) Mr. Carstarphen alleges that each of these actions is taken for the benefit of Reno Flying Service and Mr. Milsner as majority shareholder of Reno Flying Service, in breach of Mr. Milsner's fiduciary duties to American Medflight and to Mr. Carstarphen as a minority shareholder of American Medflight. (Id.)

II. Plaintiff's First Claim for Relief

Federal Rule of Civil Procedure 9(b) provides: "In alleging fraud ... a party must state with particularity the circumstances constituting fraud...." Rule 9(b) imposes this heightened pleading requirement so that the fraud-action defendant "can prepare an adequate answer from the allegations." Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir.2007) (internal quotation marks omitted). Applying this particularity requirement, the Ninth Circuit has held that a plaintiff must plead "times, dates, places" and other details. E.g. Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir.1985). "How much additional specificity is required depends on the nature of the individual case." Arroyo v. Wheat, 591 F.Supp. 141, 144 (D.Nev.1984).

Defendant asserts, and Plaintiff apparently does not dispute, that "[u]nder Nevada law, breach of fiduciary duty is a specie of fraud." (D.'s Motion 2(# 14).) In support of this proposition, Defendant cites Golden Nugget, Inc. v. Ham, 95 Nev. 45, 589 P.2d 173, 175 (1979). It does not appear to us, however, that Golden Nugget stands for such a broad statement. Golden Nugget stands for the proposition that when a corporate officer breaches his fiduciary duties by means of fraud, the appropriate statute of limitations under Nevada law is the one governing actions for fraud or mistake. Id. at 175. Certainly, a director of a corporation may breach his fiduciary duties by means of fraud, as the defendant in Golden Nugget did. See id. at 174 (defendant director usurped a corporate opportunity to lease property with intent to relet the property to the corporation at a substantial personal profit). It does not follow, however, that all breaches of fiduciary duty must be included under the rubric of fraud and therefore be subject to Rule 9(b)'s heightened pleading standard.

Turning now to Plaintiff's first claim for relief, we note that Plaintiff has pleaded facts in some detail, which we have summarized above. However, the facts pleaded do not appear to constitute fraud, at least in the common law sense of the term, which implies an intent to deceive on the part of the perpetrator. See, e.g., Pac. & Arctic Ry. & Nav. Co. v. United Transp. Union, 952 F.2d 1144, 1147 (9th Cir.1991) (stating common law definition of fraud). Here, despite the many facts pleaded, no details relating to any fraudulent acts by Defendant are discernible. There are no allegations that Defendant concealed or otherwise misrepresented anything with regard to the stock transactions of which Plaintiff complains, or that Plaintiff relied on any such misrepresentations.

Rather, the gravamen of the claim for relief is that Mr. Milsner's role in effectuating the stock transactions at issue was wrongful, which is somewhat different from saying it amounted to fraud. The only indication that fraud is at issue is the appearance of the word "fraudulent" in the assertion that Mr. Milsner's "breach of his fiduciary duties to Carstarphen was intentional, fraudulent and malicious...." (FAC ¶ 20(# 4).)³

The Ninth Circuit has held that "if particular averments of fraud are insufficiently pled under Rule 9(b), a district court should disregard those averments.... The court should then examine the allegations that remain to determine whether they state a claim." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003) (internal quotation marks omitted). Here, disregarding the word "fraudulent," the facts pleaded are more than sufficient to constitute a short and plain statement of a claim for breach of fiduciary duty. Under Fed.R.Civ.P. 8(a), Plaintiff need not allege more.

III. Plaintiff's Second Claim for Relief

Defendant argues that Plaintiff's Second Claim for Relief fails to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6). Specifically, Defendant argues that Plaintiff's claim is barred by the doctrine of res judicata/claim preclusion because of a judgment entered in the Second Judicial District Court of the State of Nevada. (D.'s Motion 4 (# 14).)

A. Federal Rule of Civil Procedure 12(b)(6) Standard

A motion to dismiss under Fed. R. Civ, P. 12(b)(6) will only be granted if the complaint fails to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). On a motion to dismiss, "we presum[e] that general allegations embrace those specific facts that are necessary to support the claim." Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) (quoting Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 889, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990)) (alteration in original). Moreover, "[a]ll allegations of material fact in the complaint are taken as true and construed in the light most favorable to the non-moving party." In re Stac Elecs. Sec. Litig., ...