MH Pillars Ltd. v. Realini, Case No. 15–cv–1383–PJH

• Decision Date: 14 September 2017
• Docket Number: Case No. 15–cv–1383–PJH
• Parties: MH PILLARS LTD., et al., Plaintiffs, v. Carol REALINI, et al., Defendants.
• Court: U.S. District Court — Northern District of California

277 F.Supp.3d 1077

MH PILLARS LTD., et al., Plaintiffs,

v.Carol REALINI, et al., Defendants.

Case No. 15–cv–1383–PJH

United States District Court, N.D. California.

Signed September 14, 2017

Peter B. Fredman, Law Office of Peter Fredman, Berkeley, CA, for Plaintiffs.

Kenneth Lee Marshall, Sara Ahmed, Alexandra Whitworth, Bryan Cave LLP, San Francisco, CA, Mary Beth Buchanan, Bryan Cave LLP, Christopher G. Karagheuzoff, Jonathan Montcalm, Dorsey Whitney LLP, New York, NY, Patricia Anne Welch, Dorsey & Whitney LLP, Palo Alto, CA, for Defendants.

PHYLLIS J. HAMILTON, United States District Judge

ORDER RE MOTIONS TO DISMISS FIRST AMENDED COMPLAINT

Defendants' motions to dismiss the first amended complaint ("FAC") for failure to state a claim came on for hearing before this court on June 14, 2017. Plaintiffs MH Pillars Ltd. ("MHP–UK") and MH Pillars Inc. ("MHP–USA") appeared by their counsel Peter Fredman. Defendants Carol Realini ("Realini"), Rodney Robinson ("Robinson"), Christopher Martin ("Martin"), and Ultralight Inc., f/k/a Obopay, Inc. ("Obopay") appeared by their counsel Lee Marshall and Alexandra Whitworth. Defendant Accelerated Commerce Solutions, Inc. ("ACS") appeared by their counsel Patricia Welch and Christopher Karagheuzoff.

Having read the parties' papers and carefully considered their arguments and the relevant legal authority, the court hereby GRANTS the motion of Realini, Robinson, Martin, and Obopay ("Obopay defendants") in part and DENIES it in part, and GRANTS ACS's motion, in which the Obopay defendants filed a joinder.

BACKGROUND

Plaintiff MHP–UK is a UK corporation that operates an on-line payment service– provider called "Payza." FAC ¶¶ 1, 12. Plaintiff MHP–USA is a New York corporation that is a wholly-owned subsidiary of MHP–UK. FAC ¶¶ 2, 18. MHP–UK allegedly "incorporated MHP–USA as a wholly-owned subsidiary for the purpose of entering into an agency agreement with Obopay through which Payza money transmission operations would be conducted in the U.S." FAC ¶ 18. Firoz Patel and Ferhan Patel are principals (officers and/or directors) of MHP–UK and MHP–USA.

The following facts are as alleged by plaintiffs in the FAC. In 2012, defendant Obopay (also an on-line payment service-provider) was seeking investors or a sale of its assets. FAC ¶ 14. Defendant Martin was Obopay's "chief compliance officer." FAC ¶ 15. At that same time, Firoz Patel and Ferhan Patel were "seeking a compliance solution for Payza U.S. operations." FAC ¶ 16. Martin traveled to Montreal, Canada, in February 2012, allegedly to "pitch Obopay's compliance solutions" to the Patels, among others. FAC ¶ 17. Plaintiffs assert that Martin represented that Obopay was a "fully licensed money transmitter in the U.S." and had "expertise in MTL compliance." FAC ¶ 19. They claim that it was only after MHP–USA received the proposed "Agent Agreement" in March 2012 that they learned that Obopay was not a fully-licensed money transmitter. Id.

Nevertheless, despite having this information, MHP–USA entered into the Agent Agreement with Obopay on March 28, 2012. FAC ¶ 20. The Agent Agreement provided that Obopay would appoint MHP–USA as its agent and would provide Obopay with certain regulatory compliance services in support of MHP–USA's money transfer services. FAC ¶ 20 & Exh. B. Plaintiffs assert that MHP–USA entered into the Agent Agreement in reliance on Martin's representations that the Obopay MTLs for New York and California were "pending." FAC ¶¶ 20–21; see also FAC Exh. B, Appendix 1.

Plaintiffs allege that about a month after execution of the Agent Agreement, they learned that Obopay was for sale when Martin asked if they were interested in purchasing it. FAC ¶ 25. However, plaintiffs did not purchase Obopay at that time. By October 2012, Obopay had found a buyer that intended to abandon the U.S. operations and MTLs. FAC ¶ 26. On November 9, 2012, Obopay was sold to an overseas buyer, OBP Investments, Inc. ("OBP"). FAC ¶ 27. Plaintiffs allege that OBP made no effort to comply with the assignment provisions of the Agent Agreement or satisfy regulatory "change of control" requirements. FAC ¶ 28. In addition, OBP took steps to shut down U.S. operations effective December 31, 2012. FAC ¶ 29.

On December 1, 2012, defendant Robinson, "a former Obopay executive," allegedly approached Firoz Patel about purchasing the Obopay MTL assets from defendant ACS, described as Robinson's "new Silicon Valley start-up company." FAC ¶ 30. ACS had acquired the MTL assets from defendant Realini, who had acquired Obopay from OBP). FAC ¶¶ 33, 37. On December 20, 2012, ACS entered into a "Professional Services Agreement" with MHP–USA to perform due diligence and prepare legal documents for the proposed transaction. FAC ¶ 36 & Exh. E. MHP–USA allegedly agreed to pay for the associated legal services. FAC ¶ 36.

Plaintiffs claim that the individual defendants developed and implemented a "transactional structure" that included three agreements (referred to in the FAC as the "2013 Transaction"). See FAC ¶¶ 37–41 & Exhs. F–H.

First, plaintiffs allege, the "old" Obopay made Robinson its Chief Financial Officer, and on January 25, 2013, Robinson executed an employment agreement with Realini, pursuant to which she was hired as Obopay's Chief Executive Officer ("CEO"). FAC ¶ 37(a), (b). On January 30, 2013, OBP sold its shares of Obopay (stripped of non-MTL assets) to Realini in exchange for her assumption of certain U.S. liabilities worth less than $500,000; and on January 31, 2013, the "new" Obopay sold MHP–UK 9% of its preferred stock for $1,250,000 pursuant to the "Obopay Inc. Series A Preferred Stock Purchase Agreement" ("Stock Agreement") in which Obopay covenanted to retain a balance of at least $1,000,000 on deposit in a segregated bank account, as required by MTL licensing agencies. FAC ¶ 37(c), (e), (f) & Exh. F. Thus, the parties to the Stock Agreement are Obopay and MH–UK. See FAC Exh. F.

Second, on February 4, 2013, the "new" Obopay and Realini entered into the second portion of the "2013 Transaction"—the "Option Agreement"—pursuant to which MHP–UK paid $400,000 for an option to acquire the remaining 91% of stock in Obopay at a future date for $10. FAC ¶ 37(g) & Exh. G. Thus, the parties to the Option Agreement are Obopay, Realini, and MHP–UK. See FAC Exh. G.

Third, plaintiffs allege that the "2013 Transaction" also included the "ACS Agreement"—described in the FAC as "an agreement whereby defendant ACS agreed to operate Obopay for plaintiffs' benefit and at plaintiffs' expense during a transition period before MHP–UK acquired the remaining 91% of Obopay stock." FAC ¶ 38 & Exh. H; see also FAC ¶ 39. Since the "ACS Agreement" is not dated or signed, it is not entirely clear who plaintiffs believe the parties are, apart from (presumably) ACS.

Plaintiffs allege that several issues prevented Obopay from being a fully licensed money transmitter in the U.S., including that Obopay had "effectively abandoned" its MTL assets by early 2012 and by April 2012 was "out-of-compliance for most state licenses because it had no current audit." FAC ¶ 47(a). They claim that approvals of the New York and California MTLs were never "imminent" as Martin had represented. FAC ¶ 47(b). Plaintiffs claim they were unaware of "[t]hese issues," and they relied on Obopay's "purported compliance expertise" and on Robinson/ACS to perform necessary due diligence and procure the necessary legal advice and structure and implement "a suitable transaction" (as they claim Robinson/ACS had agreed to do). FAC ¶ 48.

Plaintiffs assert that in early 2013, Robinson, Martin, and Realini "decided to double-cross plaintiffs as a means of exiting the 2013 Transaction without repaying the benefits they had obtained from it." FAC ¶ 49 (citing Doc. 51–7, Realini Decl. in Support of Defs' September 21, 2016, Motion for Bond to Secure Costs and Fees). Defendants allegedly did this (a) by causing Obopay to report to the U.S. Department of Homeland Security ("DHS") that plaintiffs were engaged in unlawful activity, and (b) by hiring an investigator to pursue the charges privately and then unlawfully charging plaintiffs $25,000 for the cost of the investigator, falsely claiming the charge was for an "audit." Id.

Plaintiffs assert that defendants appeared to be trying to help them obtain the licensure, but in fact were not, and had no intention of resolving any compliance issues. FAC ¶¶ 50–53. Plaintiffs allege that the parties established a "board-level ‘Obopay/Payza Compliance Committee’ to address the issues," which met on March 28, 2013, with Realini, Robinson, and Martin present on the call, FAC ¶¶ 51–52.

During this meeting, Realini, Robinson, and Martin allegedly represented that they had determined that the existing Obopay agency program was "non-compliant;" that Obopay needed custody and control of an amount equal to U.S. client funds in Obopay/Payza customer accounts for MTL compliance purposes; and that this issue could be resolved through MHP–USA's transfer of the funds and the provision of daily customer balance reports to Obopay. FAC ¶ 52.

Plaintiffs claim that these representations were intentionally false because the defendants did not intend to resolve any compliance issues. FAC ¶ 53. Plaintiffs also assert that defendants failed to disclose that they had already engaged in "hostile action" against plaintiffs, including initiating a private investigation and reporting suspected criminal activity to DHS, "with the intent of reneging on the 2013 Transaction." Id. Plaintiffs claim that defendants made these false representations with the intent of inducing plaintiffs to transfer the funds, and that on April 10, 2013, in reliance on defendants' false representations and non-disclosures, MHP–USA transferred $4 million in customer funds to defendants' control. FAC ¶¶ 53–54. This sum allegedly represented "all Obopay/Pazya U.S. customer funds plus a $100,000 buffer." FAC ¶ 54.

On June 3, 2013, Obopay and Realini sent a...