Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-04203/USCOURTS-cand-3_06-cv-04203-3/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 42:1983 Civil Rights Act

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CONSOLIDATED MANAGEMENT GROUP,

LCC, et al.,

Plaintiffs,

 v.

PRESTON DuFAUCHARD, et al., 

Defendants. /

No. C 06-04203 JSW

ORDER GRANTING MOTION TO

DISMISS

Now before the Court is Defendants’ motion seeking to dismiss this action, inter alia, on

the grounds of abstention. Having carefully reviewed the parties’ papers, considered their

arguments and the relevant authority, and good cause appearing, the Court hereby GRANTS

Defendants’ motion to dismiss.

BACKGROUND

According to the complaint filed in this matter, Plaintiff Consolidated Management

Group, LLC (“Consolidated”), a Kansas limited liability company acting as managing venturer

of partnerships, joint ventures, and other entities involved in the purchase and lease of drilling

and heavy-duty equipment utilized in the oil and gas industry, sponsored the offer and sale of

interests in two joint ventures. (Complaint at ¶ 8.) For both projects, Consolidated filed with

the Securities and Exchange Commission (“SEC”) a Form D, Notice of Sale of Securities

Pursuant to Regulation D (Rules 501-508), promulgated pursuant to the Securities Act of 1933. 

(Id. at ¶¶ 9, 11.) Following such filings, Consolidated filed and served with the California

Corporations Commissioner two copies of the Form D filed with the SEC, two copies of the UCase 3:06-cv-04203-JSW Document 35 Filed 09/20/06 Page 1 of 5
United States District Court

For the Northern District of California

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2 Uniform Consent to Service of Process and the $300.00 notice filing fee as required for both

ventures under California Corporations Code § 25102.1(d). (Id. at ¶¶ 10, 12.) 

Defendants contend that, by offering the securities by mass mailings and holding

seminars where the potential investors had no pre-existing relationship with Plaintiffs, the

offerings caused the securities to lose the private offering exemption and the Department of

Corporations issued an order requiring Plaintiffs to “Desist and Refrain” from marketing the

unregistered securities (the “D&R Order”). Once they received the D&R Order, Plaintiffs

elected to initiate a state administrative proceeding challenging the order and moved to dismiss

the order on the basis that the California Commissioner lacked jurisdiction over Plaintiffs

because the joint venture interests offered were not actually securities, and to the extent they

could be considered securities, the filing of the Forms D and U-2 and the payment of the

requisite fees with the State of California made the sale of the interests automatically exempt

from registration requirements of California’s securities code. The Administrative Law Judge

conducted a two-day hearing in March 2006, in which he determined that the issue of federal

preemption could not be decided at the administrative level and determined in addition that

Plaintiffs had violated the requirements of the exemption, subjecting them to the requirements

of California law. Instead of continuing to pursue their remedies in the state court system by

means of a writ, Plaintiffs elected to file the current action in federal court.

ANALYSIS

Defendants move to dismiss the complaint on several grounds, including that the Court

should abstain from adjudicating this matter pursuant to the Younger doctrine. In Younger v.

Harris, 401 U.S. 37 (1971), the Supreme Court espoused a strong federal policy against federalcourt interference with pending state judicial proceedings, absent extraordinary circumstances. 

See H.C. v. Koppel, 203 F.3d 610, 613 (9th Cir. 2000); Middlesex County Ethics Committee v.

Garden, 457 U.S. 423, 431 (1982). “The policy rests of notions of comity and respect for state

functions.” Champion Int’l Corp. v. Brown, 731 F.2d 1406, 1408 (9th Cir. 1984). These

considerations of comity and federalism dictate that “the normal thing to do when federal courts

are asked to enjoin pending proceedings in state court is not to issue such injunctions.” Ohio

Case 3:06-cv-04203-JSW Document 35 Filed 09/20/06 Page 2 of 5
United States District Court

For the Northern District of California

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Civil Rights Commission v. Dayton Christian Schools, Inc., 477 U.S. 619, 627 (1986) (quoting

Younger, 401 U.S. at 45) (emphasis in original). “Abstention is required when: ‘(i) the state

proceedings are ongoing; (ii) the proceedings implicate important state interests; and (iii) the

state proceedings provide an adequate opportunity to raise federal questions.’” Delta Dental

Plan of California, Inc. v. Mendoza, 139 F.3d 1289, 1294 (9th Cir. 1998) (internal citations and

quotations omitted). 

The Court finds that all three prongs of the Younger test are satisfied here. First,

Plaintiffs initiated the administrative proceedings. The administrative decision was adopted by

the Commissioner and declared effective as of July 20, 2006. The state court mechanism for

seeking review of the administrative decision is to file a writ of mandate with the appellate

division of the state court. See Cal. Gov’t Code § 11523. According to the uncontradicted

representations of Plaintiffs’ counsel at the hearing before this Court on the pending motions,

Plaintiffs have until September 27, 2006 to file a writ of mandate before the California state

court. Therefore, this Court finds that the state proceedings are ongoing.

Next, the Court must determine whether the state court actions implicate important state

interests. See Delta Dental Plan, 139 F.3d at 1294. The Court finds that the ability of the

state’s regulatory commission to investigate and possibly regulate issuers of securities who are

in violation of federal and state regulation qualifies as an important state interest. 

Plaintiffs counter that there is no important state interest implicated here because, they

argue, it is readily apparent that the Commissioner and California Department of Corporations

were acting beyond their lawful scope of authority in issuing the D&R Order to Plaintiffs for

state and federal registration violations. Plaintiffs contend that because the conduct by the state

regulatory body was preempted by federal law, the state does not retain an interest in resolution

of the ultimate issue of whether Plaintiffs were qualified to sell the subject securities in

California. See Champion Int’l, 731 F.2d at 1409 (holding that state had no cognizable interest

in enforcing laws that are clearly preempted by federal law); see also Gartrell Constr. Inc. v.

Aubry, 940 F.2d 437, 441 (9th Cir. 1991) (holding that no significant state interest is served

where the state law is preempted by federal law and that preemption is “readily apparent”);

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United States District Court

For the Northern District of California

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Fresh Int’l Corp. v. Agricultural Labor Relations Board, 805 F.2d 1353, 1361 (9th Cir. 1986)

(same). 

However, the question whether the California regulatory authorities acted outside the

scope of their authority is exactly the unresolved issue in this case. It is not readily apparent

from the pleadings submitted in this matter, or the authority offered to the Court, that the state’s

conduct was explicitly preempted by federal law. Plaintiffs submit authority for the position

that securities sold in reliance on the filing of the federal Regulation D notice are exempt from

state regulatory authority. See Lillard v. Stockton, 267 F. Supp. 2d 1081, 1115 -1116 (N.D.

Okla. 2003); see also Temple v. Gorman, 201 F. Supp. 2d 1238, 1242-44 (S.D. Fla. 2002). 

However, Defendants submit authority for the proposition that the issuer, in failing to proffer

evidence that it had actually complied with the terms of the federal Regulation D forms, should

not be afforded the exemption from state regulation that it would have otherwise been entitled

to under the federal regulatory scheme. See Buist v. Time Domain Corp.. 926 So.2d 290, 296-

98 (Ala. 2005) (distinguishing and disregarding Lillard and Temple decisions and holding that

because securities were sold in Alabama that were not in compliance with federal regulation

granting exemption, federal law did not preempt state regulatory authority). Based on the

record and the available authority, the Court cannot find that preemption is “readily apparent”

on the face of the pleadings. Therefore, the Court finds that the second prong of the Younger

test has been satisfied.

Finally, the Court must address whether the state proceedings provide an adequate

opportunity to raise federal questions. See Delta Dental Plan, 139 F.3d at 1294. There is no

dispute that the California state courts may address the issues presented in this action, that is,

whether the actions by the California Commissioner were preempted by federal law and federal

regulatory authority, and if not, whether those actions were proper. Because the Court

concludes that the claims Plaintiffs make here could be litigated in the state proceedings, such a

forum provides an adequate opportunity to raise federal questions.

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United States District Court

For the Northern District of California

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 In light of this Court’s dismissal of the action based on the Younger doctrine, the

Court DENIES Plaintiffs’ motion for preliminary injunction as moot. This ruling is without

prejudice to Plaintiffs reasserting the same issues before the state court.

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Accordingly, all three prongs of the Younger test have been satisfied. The Court

therefore abstains from adjudicating Plaintiffs’ claims in this matter and dismisses the

complaint.

CONCLUSION

For the foregoing reasons, Defendants’ motion to dismiss is GRANTED.1

IT IS SO ORDERED.

Dated: September 20, 2006 

JEFFREY S. WHITE

UNITED STATES DISTRICT JUDGE

Case 3:06-cv-04203-JSW Document 35 Filed 09/20/06 Page 5 of 5