Shaper v. Zadek, 21-cv-00493-EMC

• Decision Date: 31 August 2021
• Docket Number: 21-cv-00493-EMC
• Court: U.S. District Court — Northern District of California
• Parties: JUDITH S. SHAPER, et al., Plaintiffs, v. ROBERT A. ZADEK, et al., Defendants.

JUDITH S. SHAPER, et al., Plaintiffs, v. ROBERT A. ZADEK, et al., Defendants.

No. 21-cv-00493-EMC

United States District Court, N.D. California

August 31, 2021

ORDER GRANTING IN PART DEFENDANTS' MOTION TO DISMISS

DOCKET NO. 32

EDWARD M. CHEN UNITED STATES DISTRICT JUDGE

Plaintiffs are Judith S. Shaper and the Judith S. Shaper Living Trust (“Shaper Trust”). They have sued Robert A. Zadek and two affiliated companies, L.O. Annie, Inc. and Lenders Funding LLC. Defendants solicited Plaintiffs to give loans in the form of Promissory Notes, and Plaintiffs gave such loans totaling about $4 million. Plaintiffs allege that the Promissory Notes constitute securities under both federal and state law and that Defendants sold these securities without being registered to do so, as required by federal and state law. Plaintiffs also charge Defendants with making material misrepresentations and/or omitting material facts in connection with the sale of the securities. Plaintiffs have asserted various causes of action in the operative second amended complaint (“SAC”), including claims for violation of federal and state securities law and state tort claims. Currently pending before the Court is Defendants' motion to dismiss the SAC.

Having considered the parties' briefs and accompanying submissions (including the supplemental briefing filed post-hearing), as well as the oral argument of counsel, the Court hereby GRANTS in part the motion to dismiss. Specifically, the federal securities claims are hereby dismissed with prejudice. The Court declines to exercise supplemental jurisdiction over the remaining state law claims.

I. FACTUAL & PROCEDURAL BACKGROUND

In the operative SAC, Plaintiffs allege as follows.

Mr. Zadek is a CPA and a lawyer at the Buchalter law firm. See SAC ¶¶ 7, 41. He is also the president and sole shareholder of L.O. Annie (a corporation). L.O. Annie, in turn, is the managing member of Lenders Funding (a LLC). See SAC ¶¶ 7-8.

Lenders Funding is a company that loans money to third parties. On its website, Lenders Funding states that, “‘since formation, we have worked with over 150 lenders and factors and have supplied several hundred million dollars in funding.'” SAC ¶ 24 (emphasis omitted). According to Plaintiffs, Lenders Funding gets the money to loan to third parties by selling Promissory Notes. Lenders Funding has sold “hundreds of millions of dollars of . . . Promissory Notes to hundreds of investors (primarily but not exclusively domiciled in the State of California) for over a decade.” SAC ¶ 24. See, e.g., SAC ¶ 54 (alleging that Lenders Funding “raised $5, 000, 000 via the issuance of Promissory Notes (like those sold to the Plaintiffs), then loaned those funds to third party Cash4Cases, Inc.”).

Mr. Zadek and Ms. Shaper were once married but divorced. See SAC ¶ 42. From April 2009 through December 2019 (apparently, all after the divorce), Mr. Zadek solicited Plaintiffs to invest in a number of Promissory Notes. See SAC ¶ 43 & Ex. G (Promissory Notes and/or Amendments thereto). Plaintiffs invested about $4 million in Promissory Notes. See SAC ¶ 45.

According to Plaintiffs, Mr. Zadek misrepresented material facts and/or failed to disclose material facts in connection with his solicitation of Plaintiffs. For example,

Mr. Zadek specifically stated to [Ms.] Shaper at the time he solicited each Promissory Note and Amendment that the investments were safe and secure, and Ms. Shaper could have her money back “at any time, ” despite that the notes were subordinated to a senior lender and stated on their face they would not be due for 180 days upon request.

SAC ¶ 51.

In addition, Mr. Zadek failed to disclose the following at the time he solicited Plaintiffs:

• That Defendants were not registered with the relevant government agencies as an investment adviser or broker/dealer.

• That there were risk factors associated with the Promissory Notes and what those risk factors were.

• That the Promissory Notes had a subordination provision and that subordination put the safety of Plaintiffs' investment at risk.^[1]

• Lenders Funding's financial statements.

• The financial status of the third parties to whom Lenders Funding gave loans. See SAC ¶ 58.

Another failure to disclose identified by Plaintiffs took place when Mr. Zadek sought certain Amendments to some of the Promissory Notes in December 2019. Apparently, Mr. Zadek did not disclose that he needed the Amendments because Lenders Funding was not able to make its payments owed to Ms. Shaper - specifically, because Lenders Funding had been defrauded by another company, Cash4Cases, Inc. (“C4C”), out of $5 million. See SAC ¶ 53; see also SAC ¶ 54 (alleging that Defendants “knew that C4C's fraud in connection with the $5, 000, 000 loan [that Lenders Funding gave to it] severely negatively impacted Lenders Funding's ability to repay then-outstanding Promissory Note investors, including Ms. Shaper”). On their face, the Amendments extended the due date for the relevant Promissory Note and/or changed the Senior Lender. See SAC, Ex. G (2019 Amendments).

In March 2020, Plaintiffs made a written demand on Defendants, asking that all outstanding funds invested in the Promissory Notes be returned. See SAC ¶ 61 & Ex. I (email from Ms. Shaper to Mr. Zadek). In spite of that demand, Defendants have not returned any funds. See SAC ¶ 64. The total amount owing on the Promissory Notes is more than $1.6 million. See FAC ¶ 64.

Based on, inter alia, the above allegations, Plaintiffs have asserted the following claims for relief.

(1) Failure to register as an investment adviser in violation of the Investment Advisers Act § 202(a)(11). See 15 U.S.C. § 80b-2(a)(11).

(2) Failure to register as a broker and/or dealer in violation of the Securities Exchange Act. See generally 15 U.S.C. § 78a et seq.

(3) Material misrepresentations and/or omissions in violation of § 10(b) of the Securities Exchange Act and Rule 10b-5. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.

(4) Failure to register as a broker and/or dealer in violation of California Corporations Code § 25210(b).

(5) Failure to register as an investment adviser in violation of California Corporations Code § 25230(a).

(6) Material misrepresentations and/or omissions in violation of California Corporations Code § 25400.

(7) Fraudulent inducement.

(8) Intentional misrepresentation.

(9) Promissory fraud.

(10) Negligent misrepresentation.

(11) Constructive fraud.

(12) Financial elder abuse.

(13) Breach of fiduciary duty.

(14) Conversion.

(15) Breach of contract.^[2]

II. DISCUSSION

A. Legal Standard

Federal Rule of Civil Procedure 8(a)(2) requires a complaint to include “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). A complaint that fails to meet this standard may be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6). See Fed. R. Civ. P. 12(b)(6). To overcome a Rule 12(b)(6) motion to dismiss after the Supreme Court's decisions in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), a plaintiffs “factual allegations [in the complaint] ‘must . . . suggest that the claim has at least a plausible chance of success.'” Levitt v. Yelp! Inc., 765 F.3d 1123, 1135 (9th Cir. 2014). The court “accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). But “allegations in a complaint . . . may not simply recite the elements of a cause of action [and] must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.” Levitt, 765 F.3d at 1135 (internal quotation marks omitted). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (internal quotation marks omitted).

Although Defendants have challenged all of the claims asserted by Plaintiffs, the Court focuses on the federal claims first. If there are no viable federal claims, then it would make little sense to retain supplemental jurisdiction given the early stage the proceedings. See 28 U.S.C. § 1367(c)(3) (providing that a court may decline supplemental jurisdiction over a claim if the court “has dismissed all claims over which it has original jurisdiction”).

B. Whether Promissory Notes Constituted Securities Under Federal Law

As indicated above, Plaintiffs' federal claims are all federal securities claims. Specifically, the federal securities claims are as follows:

• Count 1: Failure to register as an investment adviser in violation of the Investment Advisers Act § 202(a)(11). See 15 U.S.C. § 80b-2(a)(11).

• Count 2: Failure to register as a broker and/or dealer in violation of the Securities Exchange Act. See generally 15 U.S.C. § 78a et seq.

• Count 3: Material misrepresentations and/or omissions in violation of § 10(b) of the Securities Exchange Act and Rule 10b-5. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.

Each of these claims is dependent on there being a “security” at issue.

• Count 1: See Id. § 80b-2(a)(11) (defining “investment adviser” as, inter alia, a “person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities”; adding that the term does not include “any lawyer, accountant engineer,

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