Mewawalla v. Middleman
| Decision Date | 02 May 2022 |
| Docket Number | Case No. 21-cv-09700-EMC |
| Parties | Rahul MEWAWALLA, Plaintiff, v. Stanley C. MIDDLEMAN, et al., Defendants. |
| Court | U.S. District Court — Northern District of California |
Patrick R. Kitchin, Kitchin Legal, APC, Oakland, CA, for Plaintiff.
Arash Beral, Caroline Donelan, Craig Nelson Haring, Blank Rome LLP, Los Angeles, CA, for Defendants.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS
Plaintiff Rahul Mewawalla ("Plaintiff") brings this action against his former employers, supervisors, and several of their associates for fraud, breach of contract, various California statutory offenses, constructive trust, equitable accounting, and declaratory relief. Defendants include corporate entities Freedom Mortgage Corporation ("FMC"), Xpanse LLC ("Xpanse"), Keystone B2B LLC ("Keystone"), Archwell Holdings LLC, Archwell Solutions LLC, and Archwell Management LLC (collectively referred to as the "Archwell entities"), as well as the corporations’ directors, Stanley Middleman, Michael Middleman, Gregory Middleman, and Erik Anderson.
Before the Court is defendants’ motion to dismiss the complaint on the following grounds: (i) lack of personal jurisdiction under Federal Rules of Civil Procedure 12(b)(2), and (ii) failure to state a claim under Federal Rules of Civil Procedure 12(b)(6). For the reasons set forth below, the Court GRANTS IN PART and DENIES IN PART Defendants’ motion.
In early 2019, Plaintiff began speaking with Stanley Middleman, CEO of FMC, about the Middleman family's desire to create a tech company that would develop and market technology for lenders and service providers in the mortgage industry. Complaint ¶ 15. Stanley Middleman and Michael Middleman wanted to hire Plaintiff to work at FMC and later lead the family's new technology company. Id. ¶¶ 21-22.
Stanley Middleman and Michael Middleman, who serves as FMC's Executive Vice President, began negotiating Plaintiff's terms of employment and discussing plans for the new technology company with Plaintiff in 2019. Id. ¶ 15. Plaintiff alleges that during these discussions he made clear that receiving meaningful equity in the new technology company was required for him to consider the position at FMC. Id.
During these negotiations, Stanley Middleman detailed his plans for the new technology company, describing it as a multi-billion-dollar opportunity. Id. ¶ 20. Plaintiff alleges that Stanley Middleman assured Plaintiff that FMC would contribute 140 to 150 million in yearly recurring revenue to the new technology company in order to help the technology company reach multi-billion-dollar status. Id. ¶ 17. Plaintiff also alleges that Stanley Middleman promised that FMC and Archwell Holdings would transfer substantial intellectual property to the new company (Id. ¶¶ 19-20); that the new company would be an independent, public facing corporation unlike the Middleman's other closely held companies (Id. ¶ 17); and that Stanley Middleman would convince other leading U.S. mortgage companies to contribute and work with the new company. Id. ¶ 18.
Negotiations continued, and on November 7, 2020, Plaintiff, Stanley Middleman, Michael Middleman, and other executives met to finalize the employment contract's terms. Id. ¶ 22. During this conversation, Stanley Middleman reiterated many of the representation he had made about the new technology company, promising that Plaintiff's equity in the company would be significant and that Plaintiff's position at the new company would be long-term. Complaint ¶¶ 26-28.
During this conversation, Plaintiff allegedly warned Stanley Middleman that he had an employment offer from another large company which included substantial equity. Id. ¶ 26. In response, Stanley Middleman told Plaintiff that he expected Plaintiff to take the new technology company public and lead it through an IPO. Id. Stanley Middleman also assured Plaintiff that Plaintiff's employment would transfer from FMC to the new technology company after the new technology company was incorporated. Id. ¶¶ 26-27.
Plaintiff and FMC finally reached an agreement on February 18, 2020 with Stanley Middleman signing the employment contract on behalf of FMC. Id. ¶ 39. The FMC contract specified that Plaintiff would serve as FMC's Chief Digital Officer, "based and working in San Francisco," until entering into an "employment agreement with [the new technology company] in a form that is mutually agreeable to the parties." Id. (Ex. A at 100). An unsigned employment contract for the new technology was attached as an exhibit to Plaintiff's contract with FMC. Id. (Ex. A at 132). The unsigned employment contract for the new technology company was substantially the same as the signed FMC contract.
The employment duties listed in Plaintiff's FMC contract included "creating, and running a new affiliate of the Company." Id. (Ex. A at 100). The FMC contract also specified that Plaintiff would be issued equity in the new technology company once his employment was transferred from FMC to the new company and an equity plan was created. Id. (Ex. A at 103). On May 27, 2020, a few months after Plaintiff began working for FMC, Defendants incorporated the new technology company, later naming it Xpanse. Id. ¶ 42.
Plaintiff does not allege that he or Xpanse ever signed the employment contract that was attached to Plaintiff's FMC contract. However, Plaintiff maintains that he began working for Xpanse after it was incorporated, hiring employees, creating a business strategy, and building out Xpanse's technology. Id. ¶ 43-47. Despite their alleged refusal to transfer Plaintiff's employment to Xpanse, the Middlemans required Plaintiff to move to Bellevue, Washington where Xpanse had decided to move headquarters. Id. ¶ 76. Plaintiff was also listed as Xpanse's CEO on its website. Id. ¶ 44.
Several months into his tenure at FMC and Xpanse, Plaintiff's relations with the Middleman's began to sour. Though Plaintiff believed that he would be made the leader of Xpanse and run it as a publicly facing company, the Middlemans allegedly failed to officially transfer Plaintiff's employment from FMC to Xpanse. Complaint ¶ 51. The Middlemans also did not allow Plaintiff to run Xpanse as an independent company. Id. ¶ 65.
Additionally, Plaintiff alleges that he and Defendants failed to agree on an equity plan for Xpanse, causing the equity which Plaintiff had been promised to never issue. Id. ¶ 84. In addition to failing to issue the equity, Defendants allegedly took actions which decreased the overall value of Xpanse's equity and were not in line with statements that had been made during Plaintiff's employment contract negotiations. These actions included:
In tandem with these failings, defendants Stanley Middleman, Gregory Middleman, Michael Middleman, and Erik Anderson pressured Plaintiff to participate in a plan which Plaintiff believed was illegal. Id. ¶¶ 90-91. In September 2020, during discussions surrounding Xpanse's equity plan, Gregory Middleman represented to Plaintiff that he wanted to "demonstrate externally during fundraising events ... that the share value for all equity holders was equal," while internally calculating the share value for the Middleman family differently by crediting their "shares with additional several million in revenue through and related to their affiliated entities." Id. ¶ 90. After Gregory Middleman unveiled this plan, Stanley Middleman, Gregory Middleman, and Michael Middleman, all on separate occasions, threatened that "[Plaintiff] would suffer adverse consequences if he did not endorse their scheme." Complaint ¶ 94.
Several months later, on December 15, 2020, Plaintiff met with Michael Middleman and Erik Anderson and discussed the share evaluation scheme. Id. ¶ 105. Plaintiff refused to go along with the plan and asked to reveal the scheme to his leadership team at Xpanse. Id. ¶ 108. In response, Michel Middleman and Erik Anderson "issued an ultimatum to Plaintiff to submit to the secret equity scheme ... or face adverse consequences." Id. ¶ 111. Roughly a month later, on January 21, 2021, Stanley Middleman informed Plaintiff that he was fired for cause. Id. ¶ 134.
Under Federal Rule of Civil Procedure 12(b)(2), a court must dismiss an action where it does not have personal jurisdiction over the defendant. Where, as here, no federal statute authorizes personal jurisdiction, the court applies the law of the state in which the court sits. Panavision Int'l, L.P. v. Toeppen , 141 F.3d 1316, 1320 (9th Cir. 1998). California's long-arm statute, Cal. Code Civ. P. § 410.10, extends to the limits of federal due process requirements, so the Court need only conduct jurisdictional analysis under federal due process. Schwarzenegger v. Fred Martin Motor Co. , 374 F.3d 797, 800-01 (9th Cir. 2004).
Personal jurisdiction may be either general or specific. Bancroft & Masters, Inc. v. Augusta Nat'l, Inc. , 223 F.3d 1082, 1086 (9th Cir. 2000). Additionally, the Supreme Court has acknowledged that, because "the personal jurisdiction requirement is a waivable right, there are a ‘variety of legal arrangements’ by which a litigant may give ‘express or implied consent to the personal jurisdiction of the court.’ " Burger King Corp. v. Rudzewicz , 471 U.S. 462, 472 n.14, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) (citation omitted). This includes consenting to a court's jurisdiction by contract. See id. (...
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