Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_09-cv-03330/USCOURTS-cand-5_09-cv-03330-3/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 28:1331 Fed. Question

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 NO. C 09‐03330 RS

ORDER 

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United 

States District 

Court

For the Northern District of California 

*E-Filed 07/09/2010* 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

SAN JOSE DIVISION 

MSGI SECURITY SOLUTIONS, INC.,

 Plaintiff, 

 v. 

HYUNDAI SYSCOMM CORPORATION, 

et al., 

 Defendants. 

____________________________________/

No. C 09-03330 RS 

ORDER DENYING IN PART AND 

GRANTING IN PART MOTION TO 

DISMISS 

I. INTRODUCTION 

 In this motion to dismiss defendants accuse plaintiff, and its counsel, of “sharp practice” in 

pleading claims that they contend are not viable. Invective aside, defendants have effectively 

admitted that plaintiff has a viable complaint, as this motion only challenges four of the ten claims 

for relief pleaded in the First Amended Complaint. For the reasons explained below, the motion 

will be granted in part and denied in part. 

II. BACKGROUND 

 This motion follows a prior set of motions to dismiss that were granted in part, with leave to 

amend. As previously described, plaintiff MSGI Security Solutions, Inc. alleges it entered into a set 

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of complex business transactions with defendants, believing it was doing business with subsidiaries 

of the international business conglomerate based in Korea formerly known as Hyundai, and now 

known as Hynix. MSGI contends the transactions were permeated with fraud, and that it lost 

millions of dollars as a result. Defendants now move to dismiss some, but not all, of the claims for 

relief, and also challenge the sufficiency of the “alter ego” allegations in the complaint.1

 The basic 

facts as alleged are not substantially different from those described in the previous order, and will 

not be recounted here. The prior motions to dismiss were granted in large part because plaintiff had 

failed to specify which defendants had committed which acts. As the present motion to dismiss 

impliedly concedes, that is no longer an issue—the First Amended Complaint is clear as to the role 

of each defendant in the alleged wrongdoing. Defendants contend, however, that plaintiff has failed 

to allege sufficient facts to state (1) any alter ego claim, (2) any securities fraud claim, (3) any 

breach of contract claim, or (4) any conversion claim. 

III. LEGAL STANDARDS 

 The prior order observed that a dismissal under Rule 12(b)(6) may be based on the lack of a 

cognizable legal theory or on the absence of sufficient facts alleged under a cognizable legal theory. 

Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121 (9th Cir. 2008); Navarro v. Block, 250 

F.3d 729, 732 (9th Cir. 2001). Plaintiff argues that a complaint may not be dismissed unless “it 

appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would 

entitle him to relief.” Opposition at 15:8-10, citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957). 

The Supreme Court, however, has rejected that formulation of the test. See Bell Atl. v. Twombly, 

550 U.S. 544, 555, (2007); Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950-51 (2009). Rather, “[t]o survive 

a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a 

 

1

 Defense counsel previously appeared on behalf of the Korean corporate defendants. This motion, 

however, is brought only on behalf of the domestic corporations and individuals. It is not clear why 

defendants contend that the entire action should be dismissed with prejudice, given that they only 

challenge some of the claims for relief. 

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claim to relief that is plausible on its face.’ 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, supra, 129 S.Ct. at 1949 (quoting Twombly, supra, 550 U.S. at 

556). 

IV. DISCUSSION 

A. Alter ego

 Defendants first contend that MSGI has failed to allege sufficient facts to support its claim that 

the corporate veil should be pierced such that it can hold the individual defendants liable for acts 

undertaken in the name of the entities. It is not immediately clear that this argument is even properly 

before the Court, because, as MSGI points out, this motion was filed on behalf of the corporate 

defendants, not the individuals. Placing substance over form, however, even assuming the 

individual defendants have properly raised this issue, the alter ego allegations are sufficient. 

Defendants’ argument is, in essence, that MSGI should be required to plead additional factual detail 

showing that the individuals “comingled funds” with the entities and/or that they have a “unity of 

interest” with them. The parties are in agreement that “conclusory” allegations do not suffice. The 

gravamen of the complaint here, however, is that the individual defendants used a series of shell 

entities to separate MSGI from its money. While defendants may be correct that MSGI’s 

allegations in part imply that some of them may be separate entities maintaining appropriate 

corporate formalities, there is no basis at the pleading stage to foreclose the alter ego claims. 

Accordingly, the motion to dismiss those claims is denied. 

B. Rule 10(b) 

 As described in the prior order, MSGI contends it contracted with defendant Hyundai 

Syscomm, Corporation (“HSC”) to sell 865,000 shares of its stock to HSC in exchange for certain 

licensing rights and the sum of $500,000. At HSC’s direction, MSGI issued the stock certificate not 

to HSC, but to a company called Anyuser, Inc., which was represented to be one of HSC’s 

“affiliated companies.” MSGI alleges it has since learned that HSC arranged for the stock to be 

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transferred to Anyuser, Inc. because it was deeply in debt to Anyuser. HSC paid an initial $200,000 

under the stock agreement, but withheld the balance. MSGI argues it was thereby defrauded into 

selling its stock to defendants “in exchange for worthless contracts.” 

 Defendants now argue that MSGI has failed to state a securities law violation because it has 

not suggested that they made any misrepresentation as to the value of MSGI’s stock. Defendants do 

not argue that plaintiff has failed to allege fraudulent statements or scienter with sufficient 

specificity. Rather, defendants rely on the obvious fact that MSGI was in the best position to know 

its own value. In response, MSGI points out that Rule 10(b) prohibits any false statement “in 

connection with” the purchase or sale of securities. Defendants’ cursory response to this point is 

only that MSGI supposedly made more money by selling its stock at a price inflated by defendants’ 

misrepresentations. 

 Defendants have failed to respond substantively to the argument that but for their alleged 

misrepresentations, MSGI would not have sold its stock. Accordingly, MSGI has sufficiently 

pleaded misrepresentations by defendants “in connection with” the sale of stock, and the motion to 

dismiss the third claim for relief is therefore denied. 

C. Breach of contract

 The sixth “cause of action” in the First Amended Complaint alleges that defendants breached 

(1) a license agreement between MSGI and HSC; (2) a subcontracting agreement between the same 

parties; and (3) a “distribution agreement and purchase order” between MSGI and defendant Apro 

Media Corp. 

 Defendants contend the allegations of breach of the license agreement are insufficient 

because review of that contract would show that MSGI, not HSC, had the obligation thereunder to 

provide technology and products.2

 MSGI argues that HSC was required by the license agreement to 

 

2

 Defendants correctly argue that it would be appropriate for the Court to consider the terms of that 

contract, whether or not it was attached to the complaint. They did not, however, provide a copy of 

it until they filed their reply brief. Even assuming the document is properly before the Court, it does 

not call for a different result. 

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develop source code for MSGI products, which it never did. While it is not clear that the license 

agreement imposed any obligation on HSC to develop code, as opposed to giving it a right to do so, 

this is an issue that cannot be resolved at the pleading stage. 

 Defendants’ attack on the claims for breach of the subcontract agreement conclusorily 

asserts they had no duty to provide MSGI with subcontracts, and that this action is time-barred by a 

contractual provision requiring actions to be brought within twelve months. Even assuming, 

however, that defendants had no specific contractual duty to provide MSGI with any particular 

number of subcontracts, MSGI may still pursue a claim that defendants breached the contract by 

failing to make good faith efforts to provide those contracts. Defendants argue that because the 

complaint alleges HSC offered MSGI one subcontract with Honeywell, it satisfied any contractual 

obligation it may have had. This, however, is a factual issue also not suitable for resolution on a 

motion to dismiss. Similarly, defendants’ underdeveloped argument that the claim for breach of the 

subcontracting agreement is time-barred is rejected, without prejudice to renewal at summary 

judgment or at trial. 

 As to the distribution agreement and purchase order, defendants do not appear to contend 

that the complaint fails to state a claim for breach by defendant Apro Media Corp. Rather, 

defendants contend the complaint should be dismissed to the extent that it seeks to hold other 

defendants liable for Apro’s alleged breach. As discussed above, the complaint sufficiently alleges 

alter-ego liability to permit the individual defendants to be held to account for the corporate 

obligations, should plaintiff ultimately prove its claims. 

 MSGI further argues that it has alleged defendant Hirsch Capital would “guarantee and pay 

the outstanding invoices” under the distribution agreement and purchase order and that it is therefore 

liable as a guarantor. As defendants point out, however, a guarantee agreement is subject to the 

statute of frauds. See Cal. Civ. Code § 1624(a)(2) (“The following contracts are invalid, unless 

they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged 

or by the party’s agent . . . A special promise to answer for the debt, default, or 

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miscarriage of another.”) Thus, while it does not change the fact that complaint states a claim, 

MSGI’s argument that Hirsch Capital can be held liable as a guarantor appears not to be tenable. 

The motion to dismiss the breach of contract claims is therefore denied, except to the extent MSGI 

seeks to hold Hirsch Capital liable as a guarantor. 

D. Conversion

 MSGI alleges two acts of “conversion” by defendants. First, MSGI contends that the $5.5 

million it paid to defendants under the parties’ contracts was converted. Second, MSGI alleges that 

it was conversion for defendant AMC to stop payment on a $3.8 million dollar check after MSGI 

had verified that it was drawn on sufficient funds and deposited it in its bank account. Although the 

point is more technical than substantive, defendants are correct that MSGI has not pleaded a viable 

claim for conversion. The $5.5 million it paid to defendants may be recovered, if at all, as damages 

for breach of contract or fraud. The $3.8 million dollar check was never paid, and therefore did not 

represent property that was ever in MSGI’s possession. Accordingly, the motion to dismiss is 

granted as to the seventh claim for relief.3

 

E. Dishonored Check

 Defendants explicitly concede that the ninth claim for relief, for money due on a dishonored 

check, is sufficiently stated as to defendant Apro Media Corp. They argue only that individual 

defendant Benjamin Garst, who signed the check, is not personally liable. Again, it is not clear that 

this motion was brought on behalf of any of the individual defendants, but assuming it was, the 

alter-ego allegations are sufficient to state a claim. Whether or not defendant Garst ultimately has 

personal liability for the dishonored check is a question for another day. 

 

3

 MSGI contends that it should be given leave to amend to the extent this motion is granted. 

Because dismissal of the seventh claim for relief does not materially alter the scope of this action 

and because this is a second round of pleading, leave to amend is not warranted. 

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V. CONCLUSION 

 The motion to dismiss is granted with respect to the seventh claim for relief alleging 

conversion, and to the extent that the First Amended Complaint seeks to hold defendant Hirsch 

Capital as a guarantor of the obligations of defendant Apro Media Corp. The motion to dismiss is 

otherwise denied. 

IT IS SO ORDERED. 

Dated: 07/09/2010 

RICHARD SEEBORG 

UNITED STATES DISTRICT JUDGE 

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