Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-00553/USCOURTS-cand-3_05-cv-00553-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SUNNYSIDE DEVELOPMENT

COMPANY, LLC, 

Plaintiff,

v.

OPSYS LIMITED and CDT LIMITED, 

Defendants.

_____________________________________/

No. C 05-0553 MHP

MEMORANDUM & ORDER

Re: Defendants’ Motion to Dismiss

On December 14, 2004, plaintiff Sunnyside Development Company, LLC filed this action for

breach of contract and fraud in state court, naming Opsys Limited and CDT Limited as defendants. 

That action was subsequently removed to this court, and defendants now move for partial dismissal

of plaintiff’s first amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Having

considered the parties’ arguments and for the reasons stated below, the court enters the following

memorandum and order.

BACKGROUND1

Plaintiff Sunnyside Development Company is the lessor of a commercial property located at

47375 Fremont Boulevard in Fremont, California. On February 15, 2001, plaintiff agreed to lease

commercial space at the Fremont Boulevard property to defendant Opsys Limited, with the lease

term running from May 1, 2001 through April 30, 2008. Pursuant to the conditions of the lease

: 

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agreement, Opsys Limited agreed to pay plaintiff a monthly base rent, to make certain capital

improvements, and to conduct its business in an environmentally safe manner.

Opsys Limited continued to make rental payments to plaintiff until October 2002. At that

time, defendant CDT Limited (“CDT”) acquired control of Opsys’ British business, Opsys UK

Limited (“Opsys UK”). As part of the corporate reorganization accompanying that transaction,

plaintiff, Opsys Limited, and Opsys’ United States subsidiary, Opsys US, signed a novation

agreement that purportedly assigned Opsys Limited’s rights and obligations under the lease to Opsys

US. Under the terms of paragraph six of the novation agreement, the assignment was subject to a

number of conditions precedent, including a provision requiring that both parties execute a second

amendment to the lease. 

Plaintiff received no rental payments after October 2002, and Opsys US was forced into

involuntary bankruptcy by four of its creditors in May 2003. On December 14, 2004, plaintiff filed

this action in the Superior Court for Alameda County, pleading causes of action for breach of

contract and fraud under California law. That action was subsequently removed to this court, and on

February 28, 2005, defendants moved to dismiss plaintiff’s complaint pursuant to Federal Rule of

Civil Procedure 12(b)(6), arguing that plaintiff had failed to state a claim under either of the asserted

causes of action. With respect to plaintiff’s breach of contract claims, defendants argued that CDT

was never a party to the Fremont Boulevard lease and that Opsys Limited had been released from its

obligations under the lease agreement by the October 2002 novation agreement. As for plaintiff’s

fraud claim, defendants argued that plaintiff had failed to plead the elements of fraud with

particularity, as is required by Federal Rule of Civil Procedure 9(b). 

On April 22, 2005, the court issued an order granting defendants’ motion in part and denying

it in part. Specifically, the court agreed with defendants that plaintiff’s complaint fails to allege that

CDT had ever been a party to the lease agreement, thus warranting dismissal of the breach of

contract claim against CDT. The court also dismissed the fraud claims against both defendants on

the ground that plaintiff had failed to satisfy the pleadings requirements of Rule 9(b). However, in

considering the breach of contract claim against Opsys Limited, the court rejected defendants’

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argument that the terms of the novation agreement warranted granting their motion to dismiss. 

Specifically, the court concluded that because defendants had failed to submit a signed copy of the

second amendment to the lease, it could not be determined from the face of the pleadings whether all

of the conditions precedent to releasing Opsys Limited from liability for failure to comply with the

conditions of the lease had been fulfilled.2 Thus, drawing all reasonable inferences in favor of the

nonmoving party, the court held that plaintiff had stated a claim for breach of contract against Opsys

Limited.

On May 11, 2005, plaintiff filed an amended complaint, having been granted leave to do so

for the purpose of curing the deficiencies in the December 2004 complaint that the court had

identified in its April 2005 order. In the amended complaint, plaintiff again pleads causes of action

for breach of contract and fraud against both defendants. However, in contrast to plaintiff’s prior

pleadings, the amended complaint now alleges that Opsys Limited acted as the alter ego of CDT in

entering into and breaching the lease agreement, thereby entitling plaintiff to recover damages for

breach of contract from CDT as well as from Opsys. As for plaintiff’s fraud claims, the gravamen of

those claims continues to lay, as it did in the initial complaint, in plaintiff’s theory that Opsys

Limited induced plaintiff to enter into the February 2001 lease agreement without ever having any

intention to perform its obligations as lessee of the Fremont Boulevard property, although plaintiff

now seeks to overcome the hurdle posed by Rule 9(b)’s particularity requirement by identifying

several of Opsys Limited’s officers as the source of the actionable misrepresentations that defendants

allegedly made.

On May 31, 2005, defendants moved for partial dismissal of the amended complaint, arguing

that plaintiff had again failed to state a claim for breach of contract against CDT or to plead

adequately the required element fraud against either defendant. The following memorandum and

order addresses those arguments. 

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LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) “tests the legal

sufficiency of a claim.” Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Unless it appears

beyond doubt that a plaintiff can prove no set of facts in support of her claim which would entitle her

to relief, a motion to dismiss must be denied. Lewis v. Telephone Employees Credit Union, 87 F.3d

1537, 1545 (9th Cir. 1996) (citation omitted); see also Conley v. Gibson, 355 U.S. 41, 45-46 (1957). 

When assessing the legal sufficiency of a plaintiff’s claims, the court must accept as true all material

allegations of the complaint, and all reasonable inferences must be drawn in favor of the non-moving

party. See Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996) (citations omitted). 

Dismissal is proper under Rule 12(b)(6) “only where there is no cognizable legal theory or an

absence of sufficient facts alleged to support a cognizable legal theory.” Navarro, 250 F.3d at 732

(quoting Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988)). 

DISCUSSION 

I. Breach of Contract (Against CDT)

Defendants first move to dismiss plaintiff’s breach of contract claim against CDT. While

plaintiff concedes that CDT is not a party to the lease agreement that is the subject of its breach of

contract claims, it nevertheless asserts that Opsys Limited acted as CDT’s alter ego in entering into

and subsequently breaching the lease. Thus, according to plaintiff, the court should pierce CDT’s

corporate veil and hold it liable for Opsys Limited’s failure to perform its contractual duties.

As an initial matter, the court notes that although neither party has addressed the issue of

choice of law, CDT is incorporated in the United Kingdom. As there is no relevant contractual

choice of law provision, the choice of law issue turns on whether the law of the forum state or the

law of CDT’s place of incorporation should govern the alter-ego inquiry. In this diversity action, the

answer to that question must be determined based on California choice of law rules. See Klaxon Co.

Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).

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In Schlumberger Logelco, Inc. v. Morgan Equipment Co. , No. C 94-1776 MHP, 1996 WL

251951 (N.D. Cal. May 3, 1996) (Patel, J.), this court considered a similar issue arising from a

plaintiff’s attempt to hold an Austrian corporation liable for breach of contract and various torts

under an alter-ego theory. See id. at *1, *3. Applying the “governmental interest” analysis that

California courts employ in adjudicating choice of law issues, see In re Yagman, 796 F.2d 1165,

1170 (9th Cir. 1986), amended on denial of reh’g, 803 F.2d 1085 (9th Cir. 1986), cert. denied, 484

U.S. 963 (1987), the court observed that Austria, as the state of incorporation, had “a substantial

interest in determining whether to pierce the corporate veil of one of its corporations.” 

Schlumberger, 1996 WL 251951, at *3. The court therefore concluded that Austrian law supplied

the rules of decision for determining whether to hold the defendant corporation liable under an alterego theory. Id. at *4.

In the absence of any attempt by either party to brief the choice of law issue, the court sees no

reason to depart from the analysis set forth in the Schlumberger case. Thus, applying that analysis in

the case at bar, the court must look to British corporations law for the purpose of determining

whether plaintiff has alleged facts that support piercing CDT’s corporate veil.3 In essence, the theory

of alter-ego liability set forth in the amended complaint turns on allegations that defendants entered

into secret negotiations in early 2001, pursuant to which CDT sought to acquire Opsys Limited’s

British operations and to divest itself of any liability associated with the target company’s American

business, including Opsys’ contractual liability to plaintiff. According to plaintiff, the allegations

concerning this collaboration, which it alternatively characterizes as a conspiracy to breach the lease

agreement,4 are sufficient to permit a finding that Opsys Limited acted as CDT’s alter-ego in its

dealings with plaintiff.

The court finds this argument unavailing. Certainly, the corporations law of the United

Kingdom recognizes circumstances where a corporate subsidiary can be considered the alter ego of

its parent corporation. See Palmers Company Law § 2.1519 ¶ 11 (2004) (observing that “there are

many cases in which the distinction between parent and subsidiary company has been ignored by the

court”). It nevertheless remains true that piercing the corporate veil under British law generally

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requires that the parent exercise a significant degree of control over the subsidiary, going beyond

mere formal ownership and coordination of corporate strategies and extending to the direct

supervision of the subsidiary’s day-to-day business activities. See, e.g., Adams v. Cape Indus., Plc.,

[1990] Ch. 433 (holding that facts establishing a disregard for corporate formalities among members

of an integrated mining group and the parent’s strategic supervision of the subsidiary in question

were not sufficient to pierce the parent’s corporate veil under an alter-ego theory). In any event,

plaintiff does not allege that the parent-subsidiary relationship in question even existed at the time

that it entered into the lease agreement with Opsys Limited, much less that the relationship was one

in which the parent controlled the affairs of the subsidiary to such an extent as would justify piercing

CDT’s corporate veil. In fact, the court is unaware of any authority, in British law or otherwise, that

would permit it to pierce the veil of an acquiring corporation based on the facts alleged in the

amended complaint, and plaintiff has done nothing to assist the court in identifying any authority that

so holds. For that reason, the court must conclude that the allegations in plaintiff’s amended

complaint do not support holding CDT liable for the breach of contract under an alter-ego theory.

This alone is sufficient to justify dismissal of plaintiff’s breach of contract claim against

CDT. In addition, defendants correctly point out that plaintiff’s alter-ego theory is premised upon

allegations of fraudulent conduct. As the Ninth Circuit observed in Vess v. Ciba-Geigy Corp. USA,

317 F.3d 1097 (9th Cir. 2003), such allegations are deemed to “sound in fraud” even if they are

pleaded in support of a cause of action in which fraud is not a required element. See id. at 1103-04. 

Consequently, a plaintiff alleging a fraudulent course of conduct to support such a claim must satisfy

the heightened pleading standard of Federal Rule Civil Procedure 9(b), id., which requires that the

circumstances constituting fraud be pleaded with particularity. Fed. R. Civ. Pro. 9(b). Moreover,

where, as here, a plaintiff levels allegations of fraud against more than one defendant, Rule 9(b)

“requires that a plaintiff plead with sufficient particularity attribution of the alleged

misrepresentations or omissions to each defendant.” In re Silicon Graphics, Inc. Sec. Litig., 970

F.Supp. 746, 752 (N.D. Cal. 1997) (Smith, J.). That requirement is clearly not satisfied by plaintiff’s

allegations against CDT, as the only particularized allegations of fraud in the amended complaint

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involve the conduct of Opsys Limited and its officers. Thus, even if the facts that plaintiff has

alleged would permit a jury to hold CDT liable under an alter-ego theory (and they do not), those

allegations are not pleaded with adequate specificity to withstand a motion to dismiss under Rule

9(b). Thus, for this reason, as well as for the reasons stated above, the court holds that plaintiff’s

breach of contract claim against CDT must be dismissed.

II. Fraud (Against Both Defendants)

The second issue raised by defendants’ motion to dismiss requires the court to consider

whether plaintiff’s amended complaint states a claim for fraud. Under California law, the elements

of fraud are (1) a misrepresentation by the defendant; (2) knowledge of falsity (scienter); (3) intent to

induce reliance; (4) justifiable reliance; and (5) resulting damage. Bank of the West v. Valley Nat’l

Bank of Ariz., 41 F.3d 471, 477 (9th Cir. 1994) (citation omitted) (applying California law). 

Defendants argue that plaintiff’s amended complaint fails to allege at least two of these elements, the

existence of an actionable misrepresentation and scienter, and thus urges the court to dismiss the

fraud claims that plaintiff has leveled against both Opsys Limited and CDT. 

Before turning to the substance of those allegations, the court notes that while plaintiff

repeatedly alleges that “defendants” engaged in fraudulent conduct, nothing in the amended

complaint identifies any specific false or misleading statement that CDT or its employees or agents

might have made in connection with the Fremont Boulevard lease. As the court has previously

noted, such generalized allegations of fraud are not sufficient to state a claim under Federal Rule of

Civil Procedure 9(b). Moreover, the preceding discussion makes it equally clear that CDT cannot be

held liable for any fraudulent acts that Opsys Limited might have committed in the course of its

dealings with plaintiff. Thus, for the same reasons that plaintiff is unable to state a claim for breach

of contract against CDT, the fraud claim against CDT must also be dismissed.

That leaves the court to consider whether plaintiff can state a claim for fraud against Opsys

Limited. As noted above, Federal Rule of Civil Procedure 9(b) requires that “the circumstances

constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 9(b). Under Ninth

Circuit law, those “circumstances” include the precise “time, place, and nature of the misleading

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statements, misrepresentations, [or] specific acts of fraud.” Kaplan v. Rose, 49 F.3d 1363, 1370 (9th

Cir. 1994) (citations omitted), cert. denied, 516 U.S. 810 (1995). In addition, the Ninth Circuit has

observed that plaintiffs seeking to satisfy Rule 9(b) must “set forth an explanation as to why the

statement or omission complained of was false and misleading.” In re Glenfed, Inc. Sec. Litig., 42

F.3d 1541, 1548 (9th Cir. 1994) (en banc). 

What plaintiff has alleged in the amended complaint is in essence a claim for promissory

fraud. Specifically, plaintiff asserts that at or about the time that the February 2001 lease agreement

was signed, Opsys Limited CEO Gary Rhea and other representatives of “defendants” made

promises to comply with the conditions of that agreement without ever having any intention of

keeping that promise. Pl.’s Am. Compl. ¶ 15. There is little doubt that these alleged

misrepresentations are sufficiently specific so as to permit defendants to identify the circumstances

of the alleged fraud and to answer plaintiff’s amended complaint, which would generally be enough

to satisfy the requirements of Rule 9(b). See Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995),

cert. denied, 517 U.S. 1136 (1996); see also Vess, 317 F.3d at 1106 (citation and original alteration

omitted) (noting that Rule 9(b) requires a plaintiff to allege facts that are “specific enough to give

defendants notice of the particular misconduct so that they can defend against the charge and not just

deny that they have done anything wrong”). The court thus finds that plaintiff has adequately

pleaded at least one actionable misrepresentation.

That being the case, a plaintiff seeking to state a claim for fraud must also plead knowledge

of falsity, or scienter. See GlenFed, 42 F.3d at 1546. It is true that the requirement for pleading

scienter is less rigorous than that which applies to allegations regarding the “circumstances that

constitute fraud,” as Rule 9(b) states that “[m]alice, intent, knowledge, and other condition of mind

of a person may be averred generally.” Fed. R. Civ. P. 9(b). Nonetheless, nothing in the Federal

Rules of Civil Procedure relieves a plaintiff of the obligation to “set forth facts from which an

inference of scienter could be drawn.” Cooper v. Pickett, 137 F.3d 616, 628 (9th Cir. 1997) (quoting

Glenfed, 42 F.3d at 1546). In the complaint at issue here, the sum of the “facts” tending to show

scienter is a reference to the existence of “much evidence” that Opsys Limited never intended to

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perform its obligations under the lease agreement. Pl.’s Am. Compl. ¶ 15. Even when viewed in the

light most favorable to plaintiff, such a conclusory statement falls well short of what would be

required to permit a reasonable finder of fact to infer that Opsys Limited was acting with fraudulent

intent when it entered into the lease agreement in February 2001. 

Other than the above-cited allusion to “evidence” of defendants’ intent to defraud, the sole

basis for inferring scienter from the allegations in the amended complaint is premised upon

plaintiff’s assertion that Opsys Limited promised to comply with the terms of the lease agreement

but failed to do so. However, the mere fact that a party breaches a promise to perform a condition of

contract is as a matter of law insufficient to give rise to an inference that the breaching party acted

with fraudulent intent at the time that the promise was made. See Tenzer v. Superscope, Inc., 39

Cal. 3d 18, 30 (1985) (quoting People v. Ashley, 42 Cal. 2d 246, 263 (1954)) (noting that

“something more than nonperformance is required to prove the defendant’s intent not to perform his

promise”). Thus, seeing that plaintiff has made no effort to allege facts beyond Opsys Limited’s

failure to perform as promised in its attempt to plead the scienter element of common law fraud, the

court is compelled to conclude that plaintiff’s fraud claims against both defendants fail as a matter of

law. The court therefore grants defendants’ motion for partial dismissal in its entirety.

III. Leave to Amend

The sole remaining issue is whether, in light of the foregoing discussion, plaintiff should be

given leave to file a second amended complaint. In determining whether it should grant leave to

amend a complaint, the court must consider (1) the plaintiff’s bad faith; (2) undue delay; (3)

prejudice to the defendant; (4) futility of amendment; and (5) whether the plaintiff has previously

amended his or her pleadings. Nunes v. Ashcroft, 375 F.3d 805, 808 (9th Cir. 2004) (citing Bonin v.

Calderon, 59 F.3d 815, 845 (9th Cir. 1995)), reh’g and reh’g en banc denied, 375 F.3d 810 (9th Cir.

2004), cert. denied, __ U.S. __, 125 S. Ct. 1395 (2005). Here, plaintiff has already failed in two

attempts to plead facts that might lend support to its conclusory allegations regarding defendants

purportedly fraudulent and conspiratorial conduct. Because there is no reason to believe that a third

attempt to do so would be any more successful than the first two, the court sees no reason to grant

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plaintiff leave to amend its pleadings. Accordingly, the court holds that plaintiff’s breach of contract

claim against CDT and its fraud claims against both defendants should be dismissed with prejudice.

CONCLUSION

For the foregoing reasons, defendants’ motion for partial dismissal is GRANTED. Plaintiff’s

claims for breach of contract against defendant CDT and its claims for fraud against both defendants

are hereby DISMISSED WITH PREJUDICE. 

IT IS SO ORDERED.

Dated: August 8, 2005

_______________________________

MARILYN HALL PATEL

District Judge

United States District Court

Northern District of California

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1. All facts are drawn from plaintiff’s first amended complaint and from the documents incorporated

by reference therein.

2. The court also rejected defendants’ argument that plaintiff was judicially estopped from denying

the validity and enforceability of the novation agreement.

3. It should be noted that under California choice of law rules, the court need only reach the question

of “governmental interest” if the substantive law of the foreign jurisdiction differs materially from

California law. See Abogados v. AT&T, Inc., 223 F.3d 932, 934 (9th Cir. 2000) (applying

California choice of law rules). It is at least debatable that the scope of the United Kingdom’s veilpiercing doctrine is broader than its California equivalent. Compare Palmers Company Law §

2.1519 ¶ 11 (2004) (observing that “[i]t has sometimes been argued that there is emerging in English

and Scottish law a general principle that all companies in a group of companies will be treated as a

single entity”), with American Tel. & Tel. Co. v. Compagnie Bruxelles Lambert, 94 F.3d 586, 591

(9th Cir. 1996) (citations and original alterations omitted) (noting that under California law, a parent

corporation will be held liable for the debts of its subsidiary under an alter-ego theory only if the

plaintiff proves “(1) that there is such unity of interest and ownership that the separate personalities

of [the parent and subsidiary corporations] no longer exist and (2) that failure to disregard their

separate identities would result in fraud or injustice”). In any event, as the court finds that British

law does not permit CDT’s corporate veil to be pierced in the instant action, its conclusion would not

change if California law supplied the rules of decision with respect to the alter-ego issue.

4. Plaintiff’s amended complaint also characterizes CDT’s conduct as tortious interference with

contractual relations. Pl.’s Am. Compl. ¶ 11. However, because plaintiff has failed to plead that

cause of action, the court need not consider whether it has stated a claim under that theory.

ENDNOTES

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