Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01852/USCOURTS-casd-3_15-cv-01852-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

LEADING MANUFACTURING

SOLUTIONS, LP,

Plaintiff,

CASE NO. 15cv1852-LAB (PCS)

ORDER GRANTING IN PART AND

DENYING IN PART MOTION FOR

vs. SUMMARY JUDGMENT

HITCO, LTD., et al.,

Defendants.

After Plaintiff Leading Manufacturing Solutions, LP (“LMS”) discovered the two New

York corporations named as Defendants were insolvent, it filed a third amended complaint

(“TAC”) naming their shareholder Theodore Smith, Jr. as a Defendant under an alter ego

theory, and also bringing a fraud claim against Smith directly. 

The Motion

Smith moved for summary judgment. That motion is fully briefed and the Court is now

prepared to rule on it. 

Although LMS did not move for summary judgment, its opposition to Smith’s motion

asked the Court to find Smith liable to LMS as a matter of law. But summary judgment is

ordinarily requested by motion. Smith was not required to, and did not, address LMS’s

informal request for summary judgment in his reply brief. Although the Court is permitted to

grant summary judgment independent of a motion, notice and an opportunity to respond are

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required. See Fed. R. Civ. P. 56(f). Because Smith has not had notice, and there is no

obvious reason for granting summary judgment in LMS’s favor, this order deals only with

Smith’s motion.

Background

LMS is a partnership with its principal place of business in this District. Its partners are

all California citizens. The two corporate Defendants, Hitco, Ltd. and Hitco, Inc., both have

their principal places of business in New York, though LMS argues they are not actually

legally-existing corporations. Smith is a citizen of New York. 

LMS claims Smith knew the two corporations were undercapitalized, and that he was

using them as a mere shell for his own personal purposes. LMS claims he intermingled his

and the two corporations’ assets, and that corporate formalities were not observed. It also

claims Hitco, Ltd. had ceased its corporate existence before it (or Smith, acting through it)

engaged in the activities giving rise to LMS’s claims. 

According to LMS, Smith caused the corporations to enter into purchase agreements

with LMS, knowing the corporations could not pay. LMS argues that Smith knowingly

misrepresented the corporations’ status to outsiders, including falsely suggesting the

corporations were large and healthy and had offices around the world that were staffed with

local employees. LMS claims Smith selectively paid creditors when it was in his interest to

do so. 

LMS alleges that Hitco, Inc. purportedly obtained a patent for a product called the

Smart Clamp, which it transferred for no consideration to Hitco., Ltd. Hitco, Inc. is also

alleged to be the owner of a patent for a product called the Sani-Lock. LMS alleges that

Smith, acting under the auspices of the Hitco corporations, asked LMS to produce two

versions of the Smart Clamp, all the while offering LMS assurances of the corporations’

viability. LMS, acting on the basis of his representations, expended money and effort to

produce the products that were ordered, but was not paid.

The TAC does not allege specific dates for most of these events, but they cover the

time period from roughly 2010 to early 2015. The purchase order is dated August 22, 2011.

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Legal Standards

Courts are split on whether there is a right to a jury trial on the issue of piercing the

corporate veil under an alter ego theory. See United States v. Vacante, 2010 WL 2219405

at *3 (E.D. Cal., June 2, 2010). See also Logtale, Ltd. v. IKOR, Inc., 2015 WL 12942493 at 

*1 (N.D. Cal., Dec. 1, 2015) (submission of alter ego question to the jury was proper). But

Smith’s brief treats it as a jury question, subject to the usual summary judgment standards,

and LMS’s brief does not address the issue. The Court’s working assumption is that, unless

summary judgment is granted, the question will be submitted to a jury.

Summary judgment is appropriate if the evidence shows that there is “no genuine

dispute as to any material fact and the movant is entitled to judgment as a matter of law.”

Fed. R. Civ. P. 56(a). The movant bears the burden of showing that summary judgment is

proper. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). If that burden is met, the

burden shifts to the opposing party to establish through specific facts that there is a genuine

issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505,

91 L.Ed.2d 202 (1986). When ruling on a motion for summary judgment, the Court looks to

evidence; mere allegations or arguments are not sufficient to withstand a motion for

summary judgment. Id. Arguments in the briefing must be supported by specific citations to

evidence; the Court is not required to search through the exhibits to find it. Orr v. Bank of

America, 285 F.3d 764, 775 (9th Cir. 2002) (holding that failure to cite page and line

numbers of exhibits offered in opposition to motion for summary judgment warranted court's

exclusion of that evidence); Forsberg v. Pacific N.W. Bell Tel. Co., 840 F.2d 1409, 1418 (9th

Cir.1988) (holding a district court is “not required to comb the record to find some reason to

deny a motion for summary judgment”).

The evidence of the non-moving party is to be believed, and all reasonable inferences

that may be drawn from the facts must be drawn in favor of the opposing party. Anderson,

477 U.S. at 255. The Court does not weigh the evidence or resolve disputed issues of fact.

Id. at 249. Rather, the Court's role is to determine whether there is a genuine issue of

/ / /

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material fact for trial. Id. Disputes about immaterial facts do not preclude summary judgment.

Lynn v. Sheet Metal Workers' Intern. Ass'n, 804 F.2d 1472, 1483 (9th Cir.1986).

Because the Court is sitting in diversity, it applies California substantive law. See

Mazza v. Am. Honda Motor Co., 666 F.3d 581, 589 (9th Cir. 2012).

Arguments and Analysis

Smith argues that under the California’s “internal affairs” doctrine, only one state

should be permitted to regulate a corporations internal affairs, and usually this will be the

state of its incorporation. For this reason, he argues, New York law should be applied to

determine whether he can be personally liable. LMS contends that the “internal affairs”

doctrine is inapplicable here. Both parties, however, argue that under either New York or

California law, they are entitled to prevail on this issue.

The Court agrees that New York law governs Smith’s personal liability, assuming

Hitco, Ltd. is treated as a corporation. Nevertheless, the application of either state’s law

leads to the same result.

Alter Ego: Legal Standards

Ordinarily, corporations and their shareholders are considered distinct entities. Dole

Food Co. v. Patrickson, 538 U.S. 468, 474 (2003). Disregarding that distinction through

corporate veil-piercing or alter ego theory is a ““rare exception, applied in the case of fraud

or certain other exceptional circumstances . . . .” Id. at 475.

Under California law, two conditions must be met before the alter ego doctrine will be

applied. First, there must be such a unity of interest and ownership between the corporation

and its equitable owner that the separate personalities of the corporation and the

shareholder do not in reality exist. Sonora Diamond Corp. v. Superior Ct., 83 Cal. App. 4th

523, 538 (Cal. App. 5 Dist. 2000). Second, there must be an inequitable result if the acts in

question are treated as those of the corporation alone. Id. A number of factors are

considered when deciding whether there is a unity of interest, including commingling of

funds, one entity’s holding itself out as liable for the other’s obligations, identical ownership,

use of the same offices and employees, use of one as a mere shell or conduit for the other,

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inadequate capitalization, disregard of corporate formalities, a lack of segregation of

corporate records, and identical directors and officers. Id. at 538–39. Obviously, some of

these factors are more likely to be relevant when one corporation is accused of being the

alter ego of another corporation rather than an individual. No one factor is dispositive; courts

must look at all the circumstances to determine whether alter ego applies. Id. at 539. 

The fact that an obligation will remain unpaid if the corporate form is upheld is not by

itself an inequitable result that justifies application of the alter ego doctrine. See Mid-Century

Ins. Co. v. Gardner, 9 Cal. App. 4

th

1205, 1213 (Cal. App. 3 Dist. 1992). Rather, some

conduct amounting to bad faith or fraud must render recognition of the corporate form

inequitable. Id. 

Under New York law, courts are empowered to disregard the corporate form when

necessary “to prevent fraud or achieve equity.” Walkovsky v. Carlton, 18 N.Y.2d 414, 418

(1966). “The determinative factor is whether ‘the corporation is a “dummy” for its individual

stockholders who are in reality carrying on the business in their personal capacities for purely

personal rather than corporate ends.” Port Chester Elec. Const. Co. v. Atlas, 40 N.Y.2d 652,

657 (1976) (quoting Walkovsky, 18 N.Y.2d at 418). Another formulation of this same rule

is that the corporate form may be disregarded where the owner exercised “complete

domination over the corporation with respect to the transaction at issue,” and that this

domination was used to defraud or wrong the plaintiff. Am. Fuel Corp. v. Utah Energy

Development Co., Inc., 122 F.3d 130, 134 (2d Cir. 1997). Factors considered include “an

overlap in ownership, officers, directors and personnel, inadequate capitalization, a

commingling of assets, or an absence of separate paraphernalia that are part of the

corporate form . . . such that one of the corporations is a mere instrumentality, agent and

alter ego of the other. . .”) John John, LLC v. Exit 63 Development, LLC, 826 N.Y.S. 2d 657,

659 (N.Y.Sup. Ct. 2006). Some other factors are failure to observe corporate formalities,

putting in or taking out funds from the corporation for personal purposes; the sharing of office

space, address, and phone numbers; a lack of arm’s-length dealing with the corporation; and 

/ / /

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payment or guarantee of corporate debt by others. See William Passalaqua Builders, et al.

v. Resnick Developers S., Inc., et al., 933 F.2d 131, 139 (2d Cir. 1990). 

Alter Ego: Undisputed Facts

The parties agree on 25 undisputed facts: 

1. Hitco, Ltd. was formed as a Corporation in the State of New York on

July 19, 1983.

2. Hitco, Ltd. was dissolved by proclamation by the State of New York

on June 15, 1988.

3. The dissolution of Hitco, Ltd. was annulled on January 30, 2012.

4. Hitco, Inc. was formed as a Corporation in the State of New York on

September 18, 2007.

5. Hitco, Inc. acquired the “Sanitary Quick connector” (Sani Lock) patent in

May 2008 from George Carmichael.

6. Inventors John Morton and Daniel Gentle assigned the Smart Clamp patent

to Hitco, Inc. on November 24, 2010.

7. Hitco, Inc. assigned the Smart Clamp patent to Hitco, Ltd. on May 30,

2012.

8. The 100,000 piece Purchase Order known as HIT-0646 was placed on

August 22, 2011.

9. On August 22, 2011, Theodore B. Smith, Jr. was aware that Hitco, Ltd. had

been dissolved on June 15, 1988.

10. At the time the 100,000 piece Purchase Order known as HIT-0646 was

placed, Hitco, Ltd. did not own the Smart Clamp.

11. Hitco, Inc. never made a profit in any year of its existence.

12. After 2006, Hitco, Ltd. never made a profit.

13. Hitco, Ltd. paid expenses of Hitco, Inc. after 2010.

14. Hitco, Inc. distributed losses to Theodore B. Smith, Jr. on Schedules K-1

in every year of its existence.

15. Hitco, Ltd. distributed losses to Theodore B. Smith, Jr. on Schedules K-1

in every year after 2006.

16. Hitco, Ltd. never had an office in New Hampshire.

17. Hitco, Ltd. never had an office or manufacturing plant in Japan.

18. Hitco, Ltd. never had an office or manufacturing plant in Taiwan.

19. Hitco, Ltd. never had employees in countries other than the United States.

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20. Hitco, Ltd. never had an office in any country other than the United States.

21. Neither Glenn Davis nor anyone else on behalf of Plaintiff LMS ran a Dun

& Bradstreet report on Hitco, Ltd. or Hitco, Inc. prior to the time the instant

lawsuit was filed.

22. Hitco, Ltd. and Hitco, Inc. are located in the same office suite, in Oyster

Bay, New York.

23. Hitco Ltd. alone pays the rent for the office space it shares with Hitco Inc.

24. Hitco, Ltd. and Hitco, Inc. have had, and share, only two employees,

Marie Altimari and Carol Carrieri, since 2010.

25. On January 31, 2013, Theodore B. Smith, Jr. personally guaranteed a

renewed $110,000 line of credit for Hitco Ltd.

(Jt. Stmt. of Undisputed Facts (Docket no. 90-1).)

Alter Ego: Evidence

Each party supports its position with an expert witness report or declaration. Smith

offers the report of forensic accountant Tiffany Tso, who concluded that the two corporate

entities were not alter egos of each other or of Smith.1 LMS offers the report of forensic

accountant Heather H. Xitco, who outlined factors she believed pointed to their being alter

egos. While neither has yet been qualified as an expert in this case, both at least are

accountants and may qualify. LMS argues that Tso’s report will be inadmissible at trial. Tso

argues that certain of Xitco’s opinions are unfounded.

The record evidence is fairly straightforward. Hitco, Ltd. was dissolved by the state

of New York in 1988, and at the time the purchase order was placed, was not a corporation

in good standing. It apparently continued to be operated as a corporation, though it is

unclear for how long or whether such operation was continuous.2

It was reinstated January

30, 2012. Under New York law, he argues, all contracts entered into during its period of

dissolution were validated at that time. This argument is consistent, to a point, with the

holding of Nigro v. Dwyer, 438 F. Supp. 2d 229 (S.D.N.Y. 2006), which Smith cites and relies

1 The Court looks primarily to the bases for Tso’s opinion. Her conclusion, by itself,

is not evidence. 

2 Smith offers evidence that Hitco, Ltd. operated as a Subchapter S corporation

starting March 12, 1998. (Decl. of Daniel J. Pautz at 2 (Docket no. 86-3 at 5).) 

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on. That case discusses three cases from the Second Circuit, L-Tec Electronics Corp. v.

Cougar Electronic Org., Inc., 198 F.3d 85 (2d Cir. 1999), Prentice Corp. v. Martin, 624 F.

Supp. 1114 (E.D.N.Y. 1986); and Held v. Crosthwaite, 260 F. 613 (2d Cir. 1919). Although

Smith is correct as to the general rule, there is an exception where a defendant acted

fraudulently or in bad faith. Nigro, 438 F. Supp. 2d at 236–37. Where there is “a disputed

issue of material fact concerning the bona fides of defendant’s conduct, summary judgment

is properly denied. Id. 

Under New York law, Hitco, Ltd. was a corporate entity from January of 2012 onward.

Under Nigro, however, that does not answer the question of whether Hitco, Ltd. should be

treated as a corporation for purposes of limiting Smith’s personal liability. That question is

bound up with the question of whether Smith acted fraudulently — or at least in bad faith. 

Because fraud or bad faith is an element of the alter ego analysis, the Court need not reach

this question yet. That being said, the timing in this case is different from most. In the cases

Nigro discusses, which appear to be typical, corporations are reinstated a few years after

dissolution. Here, Hitco, Ltd. was dissolved in 1988 and reinstated over twenty years later,

after Hitco, Ltd. had entered into the purchase agreement.

LMS points to a lack of other corporate formalities, such as corporate minutes or

resolutions, minutes of director meetings. Although both corporations have two shareholders

(Smith being the majority shareholder in both), no shareholder meetings were ever held. 

Since 2010, Smith has owned 94.75% of Hitco, Ltd. while Carol Ann Carrieri (an employee

of both companies) has owned the remaining 5.25%. Since 2010, Smith has owned 86%

of Hitco, Inc., while George Carmichael has owned the remaining 14%. Carmichael, the

former owner of the Sani Lock patent, acquired his interest as part of a deal by which Hitco,

Inc. acquired the patent. 

LMS identifies both corporations’ alleged undercapitalization as a factor to be

considered. Smith points to his expert’s opinion that both corporations were adequately

capitalized, given their history and business model which involved relatively low expenses,

and that at the time of the purchase order, Hitco, Ltd. had a favorable debt to equity ratio. 

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He also argues that they were both adequately capitalized at the time of incorporation. He

offers his own expert’s opinion that infusions of capital and loans he made to the companies

were normal and properly accounted for. A finder of fact is not required to accept these

characterizations, however, particularly because there is some evidence to the contrary.

As noted, Hitco, Ltd. was originally incorporated in 1988. Its corporate status lapsed

because of nonpayment of franchise taxes. It continued to operate as a corporation after that

time, though, and during that time it entered into the purchase agreement. It then paid the

back taxes and the state of New York reinstated it in 2012. Smith’s argument about the

capitalization of Hitco, Ltd. does not take into account these circumstances, and he does not

cite authority showing which of the two dates — its initial incorporation in 1988 or its

reinstatement in 2012 — is the operative date. And in any event, it entered into the purchase

agreement at a before its reinstatement.

Smith’s expert relies on Hitco, Inc. being capitalized in 2008 with $27,500 plus the

“Sanitary Quick Connector” patent and a trademark for “Sani-Lock”. (Pautz Decl. at 4.)

Smith’s expert characterizes this infusion of cash, and another in 2011 (in the form of a loan

from Smith) as normal and properly accounted for. (Pautz Decl. at 5.) Smith argues the

loans were arm’s-length transactions. But circumstances and the documentation could lead

a finder of fact to decide otherwise. As LMS points out, the only documentary evidence of

this is a promissory note signed by Smith (in his capacity as each corporation’s

representative) in 2015, with the interest that accrued between 2011 and 2015 not

capitalized. Although LMS does not press the point, Smith has relied on the fact that the

corporations’ credit rating was not high.3 A reasonable trier of fact could conclude that an

unsecured loan on such favorable terms, reduced to writing several years later, was not an 

/ / /

3 Smith, at his deposition, testified that the Dun & Bradstreet report disclosed the Hitco

entities’ poor credit rating, and he knew this because he had pulled the report himself. (Pautz

Decl., Ex. D at 8 (Smith Depo. Tr. at 79:19–23).) But he was unable to say when he had

done this. (Id.) Davis, at his deposition, also testified that he looked at the Dun & Bradstreet

report on the Hitco entities later, he saw the recommended credit line was just $2,500. 

(Pautz Decl., Ex. F at 8 (Davis Depo. Tr. at 330:23–25).) 

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arm’s length transaction and instead represented Smith personally propping up the two

corporations with his own money. 

LMS’s expert, Xitco, concluded that “It is abundantly clear that without the constant

infusion of cash from Mr. Smith, neither entity could continue to exist.” (Pautz Decl. at 9

(quoting Xitco report).) Tso responds with the observations:

The infusion of cash from an owner is the only way to keep a company in

business if it is generating losses and has no access to third party financing.

The funds were contributed in anticipation of the successful turnaround of

the companies, such as via the marketing of the Sani-Lock and SmartClamp

products. This is a normal business practice for companies experiencing

operating losses.

(Id.) While “normal business practice” is one way to characterize it, the Court must view the

evidence in the light most favorable to LMS. Viewed in that light, the two companies could

be seen as not creditworthy and operating at such a constant loss that they had become

insolvent. Viewed this way, the only way for them to remain in business was for their

principal shareholder, Smith, to pay their expenses personally. A creditor dealing with the

corporations at arm’s length, it could be inferred, would demand security, a more

creditworthy cosigner, a better rate of return, and/or other more favorable terms, and would

have memorialized the loan in writing before handing over any money. The parties also

agree that Smith personally guaranteed a $110,000 Bank of America line of credit for Hitco,

Ltd. on January 31, 2013. (See Vaughn Decl., Ex. 15.) 

A good deal of the remaining evidence comes in the form of testimony, and potentially

raises problems with credibility, weight, and evaluation. At this stage, the Court views all

evidence in the light most favorable to the non-moving party, i.e., LMS. Although the Court

has reviewed the evidence, only a summary discussion is necessary here. 

LMS points out that both corporations share an office, the same two employees, and

the same phone number, which is answered simply “Hitco”. (Vaughn Decl., Ex. 8 at 

120:24–121:9.) Their accounting records are kept on the same computer system, and there

is some evidence they shared operating expenses and have shared funds or expenses

without formally documenting it. There is also evidence the corporations’ employees perform

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significant work for Smith in his personal capacity and funds have been used for Smith’s

personal benefit, at least to some extent. The parties agree Hitco, Ltd. has been paying

Hitco, Inc.’s business expenses.

In general, the evidence suggests that the two corporations were fairly small and not

particularly active businesses, which to an extent explains the informality and lack of certain

records. Viewing this in Smith’s favor, it made business sense to run them this way. But

viewing the evidence in the light most favorable to LMS, as the Court must do, the same

evidence could support a finding that the two corporations were in fact extensions of each

other and of Smith. Viewed in this way, it could also support an inference that more thorough

record keeping would have disclosed some blurring of the lines.

In short, viewing the evidence in the light most favorable to LMS, a reasonable trier

of fact could find a unity of ownership and control among Hitco, Ltd., Hitco, Inc., and

Smith—or, alternatively, that each corporation was a “dummy” for Smith. But even assuming

LMS can prove this, the question of fraud, bad faith, or inequity remains.

Fraud Claim

The elements of a fraud claim are similar though not identical in New York and

California. Compare Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d

160, 170 (2d Cir. 2015) and Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir.

2003). Both include a knowing material omission or misrepresentation of fact with an intent

to induce reliance or to defraud, justifiable reliance, and resulting damages. See id. In both

New York and California, a misrepresentation is material if there is a substantial likelihood

a reasonable person would have considered it important in deciding what course to pursue. 

See Weinstat v. Dentsply Int’l, Inc., 180 Cal. App. 4

th

1213, 1223 (Cal. App. 1 Dist. 2010);

2 Fifth Ave. Tenants Ass’n v. Abrams, 583 N.Y.S.2d 466, 567 (N.Y. App. 1992). 

The TAC alleges that, in response to Smith’s request and in reliance on his

expressions of interest in ordering Smart Clamps, LMS personnel invested significant time

and effort to determine whether they could fill such an order. (TAC, ¶¶ 15–18.) These

allegations are specific with regard to what LMS did, though they do not mention dates. 

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Smith’s inducing LMS to expend effort and resources to determine whether LMS could fill

such an order does not appear to be part of LMS’ fraud claim. The heart of the claim is

Smith’s representations to LMS that were intended to, and did, induce LMS to enter into the

purchase agreement. 

The alleged misrepresentations include the statement that Hitco, Ltd. owned the

Smart Clamp patent, when in fact Hitco, Inc. owned the patent and Hitco, Ltd. was not (at

the time) a validly-existing corporation at all. (TAC, ¶¶ 17–18.) At the time, Hitco, Inc. had

not assigned the patent to Hitco, Ltd. (Id., ¶ 18.) At Smith also allegedly misled LMS with

representations that the two corporations were multinational concerns with offices and

employees in several different countries, when in fact it had two employees and a small

leased office in New York. (Id, .¶ 17.) Smith and the corporations then apparently attempted

to assign to a third company called Rubber Fab the rights to take delivery of the products

and to distribute them on the corporations’ behalf. (Id., ¶¶ 21–22.) Smith characterizes this

as brokering the deal, which he says is the corporations’ normal business model. Rubber

Fab, apparently was dissatisfied with the design, so the corporations reassumed

responsibility and promised again to pay for the clamps. (Id., ¶¶ 23–24.) 

As outlined in the TAC, the claim is premised on allegations that Smith, who never

intended to pay for the clamps, nevertheless induced LMS to enter into a purchase order

with Hitco, Ltd. (TAC, ¶ 32–39.) As a result, LMS alleges, it lost over $1 million. (TAC, ¶ 38.) 

Under Fed. R. Civ. P. 9(b), facts giving rise to a fraud claim must pled specifically

enough to give a defendant notice of the particular misconduct, and must be accompanied

by “the who, what, when, where, and how” of the charged misconduct. Kearns v. Ford Motor

Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (quoting Vess, 317 F.3d at 1106) (further citations

omitted).

The TAC is thinly pled, and does not meet this standard. But in support of its

opposition, LMS provides the declaration of Glenn Davis, who attests to representations that

the corporations, Smith, and their representatives made to him, and surrounding events. 

This declaration is detailed as to the source of the representations, the time and place they

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were made, and other circumstances surrounding them. While these facts are not treated

as part of the complaint for pleading purposes, they are considered when deciding whether

to grant leave to amend. See Schneider v. Cal. Dep't of Corr. & Rehab., 151 F.3d 1194,

1197 n.1 (9th Cir. 1998). 

Some of the representations, even if knowingly false, do not support a fraud claim. 

For example, Smith’s remark to Davis that his business was “doing very well” and similar

remarks, standing alone, are at most mere puffery. (Davis Decl., ¶ 14.) Under either New

York or California law, predictions about future events or remarks about plans, are not

fraudulent, unless Smith or one of the other representatives knew they were false at the time

they were made. See Cronos Group, Ltd. v. XComlP, LLC, 64 N.Y.S.3d 180, 193 (N.Y. App.

Div. 2017) (citing cases); Richard P. v. Vista Del Mar Child Care Serv., 106 Cal. App. 3d 860,

865 (Cal. App. 2 Dist. 1980). Similarly, under either state’s law unfulfilled promises to pay

ordinarily support only a breach of contract claim, and are not fraudulent unless Smith or

another representative never intended to pay. See Tenzer v. Superscope, Inc., 39 Cal.3d

18, 30 (1985); Pope v. N.Y. Prop. Ins. Underwriting Ass’n, 66 N.Y.2d 857, 857 (1985).

The alleged circumstances do not reasonably suggest that Smith intended not to pay

LMS at the time the deal was entered into. Among other things, Hitco, Ltd. had signed an

agreement with Rubber Fab, and as a result had reason to believe it would have the money

to pay LMS.4 They may imply that Smith intended to assign certain rights and responsibilities

to Rubber Fab. Here, the circumstances suggest that Rubber Fab backed out because of

unforeseen complications, leaving the corporations in a position they had not

foreseen—namely, that payment would come due without their having a buyer or distributor.

Statements about Hitco, Ltd.’s corporate status and about ownership of the patent are

probably not material misstatements here. Correcting both of them required compliance with

some formalities that Defendants apparently could and did carry perform. And even if they

/ / /

4

 Before entering into the purchase agreement, LMS was told about the agreement

between Hitco, Ltd. and Rubber Fab. (Decl. of Glenn Davis, ¶¶ 6, 9, 11–12.)

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were technically false, the falsity was effectively remedied and rendered harmless by later

events. That being said, representations implying that Hitco, Ltd. has been in continuous

operation since 1983 may be material.

The only part of the allegations that could support a fraud claim are representations

regarding the corporations’ creditworthiness, operations, substantial resources, and financial

stability. One of these is a statement on the corporate website that Davis consulted at the

time he was meeting with Smith, falsely claiming that Hitco, Ltd. was a corporation with

numerous employees and a worldwide reach:

HITCO LTD’s six offices around the world is [sic] staffed by multi-lingual

personnel, native to their countries, which will facilitate your communications

requirements and will act as your offshore buying representatives . . . . 

(Davis Decl., Ex. 2; see also id., Ex. 1 (giving a shorter version of the same representation).) 

Another page lists the “World Headquarters” as being in New York, “Sales Engineering” as

being in New Hampshire, and “Manufacturing” facilities as being in Taiwan and Japan. (Id.,

Ex. 3.) This information is apparently addressed to potential business partners, clients, or

customers. 

The “Welcome” page emphasizes Hitco, Ltd.’s global presence, network, and

capacity. (See Davis Decl., Ex. 1.) It is explicitly addressed to potential business contacts,

and assures them of Hitco, Ltd.’s superior management ability, international contacts, and

expertise:

HITCO LTD WORLDWIDE SALES AND SOURCING was established on

June 1, 1983. Our products and global service is [sic] balanced by a wide

range of knowledge in tooling, and cost effective manufacturing of high

quality products. We also have an excellent record managing our clients’

inventories, international warehousing, local deliveries, and the paperwork

associated with multiple vendor programs.

In addition, we developed a network of contacts and sources, so you our

clients can enjoy the benefits of international sources without experiencing

long lead times, larger than needed minimum order requirements,

international letters of credit, and all the other documents associated with

international commerce.

(Id.) These representations could be taken as assurances of Hitco, Ltd.’s ability to help

clients navigate the international market, which is not at issue in this case. But viewing the

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evidence in the light most favorable to LMS, it is reasonable to infer that by putting this

information on its website, Hitco, Ltd. intended to persuade people to do business with it, by

misleading them about the scale of its operations, and its history, stability, and resources.

Smith argues that what Hitco, Ltd. said on its website is material unless it was

intended or reasonably expected that LMS would contract with him or the corporations on

the basis of the website. But the requirements are not as narrow as Smith suggests. Hitco,

Ltd.’s public website is the kind of public representation that a potential business partner,

customer, or investor could reasonably be expected to look at and rely on. See In re Windsor

Plumbing Supply Co., Inc., 170 B.R. 503, 529 (Bankr. E.D.N.Y. 1994) (holding that

misrepresentation can support a fraud claim if there was reason to expect that the

misrepresentation would reach either that particular plaintiff or a class of persons including

the plaintiff). See also Last Atlantis Capital LLC v. AGS Specialist Partners, 749 F. Supp.

2d 828, 834 (N.D. Ill. 2010) (noting implicit agreement among courts that it investors may

reasonably be expected to read and rely on statements on company websites). Smith cites

authority for the proposition that a potential business partner is expected to do due diligence

before entering into a transaction. Gathering information from a company’s public website

would seem to be a component of this. 

Furthermore, at a 2011 meeting in New York, Davis says Smith affirmed these

representations, in part, by saying he had a manufacturing company in Japan and a

distribution channel in Europe. (Davis Decl., ¶ 14.) Davis implies, but does not expressly

say that Smith was referring to one or both of the corporations, as opposed to some side

enterprise. Davis also says that Smith omitted to mention that the corporations were

insolvent. This omission, combined with the mention of facts to suggest a financially robust

business, could have given the impression that Hitco, Ltd. would be able to satisfy any

financial obligations that arose. It also suggests other characteristics, such as the capacity

to marshal resources and to respond to challenges quickly and effectively. 

Davis also says that Smith promised his company would enter into a ten-year

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Lock products. (Davis Decl., ¶ 12.) LMS would likely have expected Hitco, Ltd. to realize

income from the Rubber Fab deal. The facts do not suggest that LMS would be looking

primarily to the assets of Smith or either of the corporations for payment, because Davis

knew about the parallel ten-year agreement between Hitco, Ltd. and Rubber Fab. (Id.) Even

so, knowing that there was some assurance of payment if the deal fell through would be

important to a reasonable company in LMS’s position.

A reasonable person in LMS’s position would want to know what kind of a company

it was doing business with. It likely would make a difference to potential business partners

whether they were dealing with a large corporation that had international offices,

manufacturing and other facilities, and numerous employees; or a small corporation that did

little more than broker deals and had two employees in one office. In other words,

misrepresentations intended to give business partners or customers the impression that

Hitco, Ltd. and/or Hitco, Inc. was a large, robust, and active business concern with a global

reach and significant resources are likely to be material. 

Whether LMS’s reliance was reasonable is a question of fact that cannot be resolved

at this point. Any information LMS might have uncovered by checking on Hitco, Ltd.’s

creditworthiness before entering into the agreement is speculative; the only evidence the

parties refer to is evidence that appeared in Dun & Bradstreet some time later. Furthermore,

there is at least some evidence that a company in LMS’s position would not routinely check

into the financial viability of its business partners or customers before entering into a deal

like this. (See Pautz Decl., Ex. F at 21 (Davis Depo. Tr. at 326:9–14).) This is further

supported by evidence suggesting that the parties believed Hitco, Ltd. had a source of

income, namely its deal with Rubber Fab. Hitco, Ltd.’s creditworthiness might be material,

but not of primary importance.

Finally, even if LMS cannot prove fraud, so as to hold Smith liable either directly or

under an alter ego theory, it may still be able to prove bad faith, which would be enough to

hold Smith liable under an alter ego theory.

/ / /

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Conclusion and Order

As it stands, the TAC does not adequately plead fraud and does not adequately plead

facts showing that Smith can be liable to LMS either directly or under an alter ego theory. 

Smith’s motion is GRANTED IN PART. If LMS can in good faith correct the fraud allegations

to allege material misrepresentations about the two corporations’ financial status and to

establish other elements of fraud, it should file a fourth amended complaint doing so, within

21 calendar days of the date this order is issued. Otherwise, the claims can go forward

against Hitco., Inc. and Hitco, Ltd. on a breach of contract claim only. In all other respects,

Smith’s request for summary judgment is DENIED.

A number of documents filed in connection with this motion were not electronically

searchable. Because the briefing amounted to over six hundred pages, this resulted in

significant delay. In future, the parties are ordered to file documents produced electronically,

rather than printed and then scanned. (See CM/ECF User’s Manual for the Southern District

of California, at 6.)

IT IS SO ORDERED.

DATED: March 19, 2018

HONORABLE LARRY ALAN BURNS

United States District Judge

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