Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-00653/USCOURTS-caed-2_07-cv-00653-2/pdf.json

Nature of Suit Code: 380
Nature of Suit: Other Personal Property Damage
Cause of Action: 28:1442 Petition for Removal

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1

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

CORRECTIONS USA, a

California Mutual Benefit

Corporation; MIKE JIMENEZ,

as a Representative of the

Members of Corrections USA,

a California Mutual Benefit

Corporation,

NO. CIV. S-07-653 LKK/EFB 

Plaintiffs,

v.

O R D E R

BRIAN DAWE, RICHARD LOUD;

GARY HARKINS; and DOES 1-100,

inclusive,

Defendants.

 /

Plaintiffs bring suit for, inter alia, breach of fiduciary

duties and fraud. Plaintiffs are Corrections USA (“CUSA”), a

California mutual benefit corporation representing publicly

employed correctional officers, and Mike Jimenez, the incorporator

of CUSA. Compl. ¶ 1-2. Defendants (Brian Dawe, Richard Loud, and

Gary Harkins) are former officers of CUSA. Plaintiffs allege that

defendants breached their fiduciary duty to CUSA when they used

CUSA funds and property to create the American Correctional Officer

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(“ACO”) and the American Correctional Officer Intelligence Network

(“ACION”).

Pending before the court is defendant Harkins’ motion to

dismiss, to strike and for a more definite statement. For the

reasons discussed herein, the motion is granted in part and denied

in part. 

I.

FACTUAL ALLEGATIONS

CUSA is a California mutual benefit corporation within the

meaning of California Corporations Code § 7110. Its purposes is

representing the common concerns among publicly employed

Correctional Officers. Compl. ¶ 1. Although it is a national

organization its principal place of business is in Auburn,

California. The majority of its members also reside in California

Defendant Harkins formally served as the Recording Secretary

for the CUSA Board of Directors, the Privatization Committee

Chairman, and Restructuring Committee Chairman. He was removed

from these positions on September 7, 2006. Compl. ¶ 13.

Plaintiffs allege that in these positions, Harkins had fiduciary

duties and duties of loyalty including duties to hold and manage

the money and property of CUSA solely for the benefit of the

organization and its members, and duties to refrain from acquiring

a pecuniary interest and any other interest adverse to the

interests of the organization and its members. Compl. ¶ 17.

Sometime in August of 2006, defendant Harkins, along with the

two other named defendants, founded two new organizations, the

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American Correctional Officer("ACO")and American Correctional

Officer Intelligence Network ("ACOIN"). Plaintiffs allege that

these two organizations are competing with CUSA and have virtually

the same mission statement of CUSA, namely, providing a national

voice for publicly employed correctional officers. Compl. ¶ 20.

Plaintiffs aver that defendants used CUSA property, such as

membership lists and other records, to create ACO and ACOIN.

Compl. ¶ 41 & 43. Plaintiffs also allege defendants stole CUSA

funds from CUSA bank accounts, including membership dues, for their

own personal gain and to fund ACO and ACION. Compl. ¶¶ 44 & 45.

Finally, defendants allegedly interfered with CUSA’s contacts by

soliciting CUSA members to join ACO and ACION and by telling

businesses not to do business with CUSA. Compl. ¶¶ 119, 136, and

137. Plaintiffs maintain that ACO and ACION had essentially the

same mission as CUSA and therefore, the new organizations were in

direct competition with CUSA. 

The gravamen of plaintiffs’ complaint is that defendants

breached their fiduciary duty when they misappropriated CUSA funds

and property for personal use and for use in creating the two new

organizations, ACO and ACION. Plaintiffs also allege that

defendants attempted to divert CUSA members to the two new

organizations and solicited business away from CUSA. 

Plaintiffs’ complaint alleges eleven causes of action: breach

of fiduciary duty, conflict of interest, prohibited advances for

expenses, falsification and failure to keep adequate books and

records, interference with business relations, interference with

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prospective business relations, unauthorized use of another’s name,

prohibited use of membership list, fraud, conversion and

accounting. 

The case was initially filed in state court and was removed

by all the named defendants on the basis of diversity jurisdiction.

Plaintiffs did not challenge the removal. 

II.

STANDARDS

A. Motion to Dismiss for Failure to State a Claim 

On a motion to dismiss, the allegations of the complaint must

be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972).

The court is bound to give the plaintiff the benefit of every

reasonable inference to be drawn from the "well-pleaded"

allegations of the complaint. See Retail Clerks Intern. Ass'n,

Local 1625, AFL-CIO v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963).

Thus, the plaintiff need not necessarily plead a particular fact

if that fact is a reasonable inference from facts properly alleged.

See id.; see also Wheeldin v. Wheeler, 373 U.S. 647, 648 (1963)

(inferring fact from allegations of complaint).

In general, the complaint is construed favorably to the

pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). In

spite of the deference the court is bound to pay to the plaintiff's

allegations, however, it is not proper for the court to assume that

"the [plaintiff] can prove facts which [he or she] has not alleged,

or that the defendants have violated the . . . laws in ways that

have not been alleged." Associated General Contractors of

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California, Inc. v. California State Council of Carpenters, 459

U.S. 519, 526 (1983). Indeed, “factual allegations must be enough

to raise a right to relief above the speculative level.” Bell

Atlantic Corp. v. Twombly, --- U.S. ----, 2007 WL 1461066 *8

(2007).

B. Motion to Strike

Rule 12(f) authorizes the court to order stricken from any

pleading “any redundant, immaterial, impertinent, or scandalous

matter.” A party may bring on a motion to strike within 20 days

after the filing of the pleading under attack. The court, however,

may make appropriate orders to strike under the rule at any time

on its own initiative. Thus, the court may consider and grant an

untimely motion to strike where it seems proper to do so. See 5A

Wright and Miller, Federal Practice and Procedure: Civil 2d § 1380.

Motions to strike are generally viewed with disfavor, and will

usually be denied unless the allegations in the pleading have no

possible relation to the controversy, and may cause prejudice to

one of the parties. See 5A C. Wright & A. Miller, Federal Practice

and Procedure, § 1380 (3 ed. 2004); See also Hanna v. Lane, 610 F.

Supp. 32, 34 (N.D. Ill. 1985). If the court is in doubt as to

whether the challenged matter may raise an issue of fact or law,

the motion to strike should be denied, leaving an assessment of the

sufficiency of the allegations for adjudication on the merits. See

5A Wright & Miller, supra, at § 1380.

C. Motion for a More Definite Statement 

“If a pleading to which a responsive pleading is permitted is

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so vague or ambiguous that a party cannot reasonably be required

to frame a responsive pleading, the party may move for a more

definite statement before interposing a responsive pleading.” Fed.

R. Civ. P. 12(e). “The situations in which a Rule 12(e) motion is

appropriate are very limited.” 5A Charles A. Wright & Arthur R.

Miller, Federal Practice and Procedure, § 1377 (3d ed. 2004).

Furthermore, absent special circumstances, a Rule 12(e) motion

cannot be used to require the pleader to set forth “the statutory

or constitutional basis for his claim, only the facts underlying

it.” McCalden v. California Library Ass'n, 955 F.2d 1214, 1223 (9th

Cir. 1990). However, “even though a complaint is not defective for

failure to designate the statute or other provision of law

violated, the judge may in his discretion ... require such detail

as may be appropriate in the particular case.” McHenry v. Renne,

84 F.3d 1172, 1179 (9th Cir. 1996).

III.

ANALYSIS

A. Defendant’s Motion to Dismiss 

Defendant asserts that plaintiff Mike Jimenez should be struck

as a plaintiff as he lacks standing. Defendant also argues that

all but plaintiffs’ fifth and eleventh claims should be struck for

failure to state a claim. For the reasons discussed herein, the

motion is granted in part and denied in part.

1. Plaintiff Jimenez’ Standing to Bring Suit 

Defendant argues that since CUSA is a named plaintiff, Mike

Jimenez, as a corporate shareholder and officer, is precluded from

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asserting a direct (as opposed to derivative) claim against those

who allegedly injured the corporate entity. See Def.’s Mot. to

Dis. at 4. Plaintiffs respond by arguing that because CUSA is a

charitable corporation, and because Jimenez was authorized to bring

suit by CUSA, Jimenez does have standing. See Pls.’ Opp’n to Mot.

to Dis. at 8. 

a. Applicable Law

As a threshold matter, the court addresses whether state or

federal law applies in analyzing Jimenez’ standing to bring suit.

Under the Erie doctrine, federal courts sitting in diversity must

apply state law to substantive issues; however, federal law governs

procedural matters. Erie Railroad Company v. Tompkins, 304 U.S.

64 (1938). The Ninth Circuit has concluded that “the

characterization of an action as derivative or direct is a question

of state law.” Sax v. World Wide Press, Inc., 809 F.2d 610, 613

(9th Cir.1987) (citations omitted). However, “[i]n federal courts,

derivative suits are subject to the procedural requirements of Fed.

R. Civ. P. 23.1. Rule 23.1 governs derivative actions ‘to enforce

a right of a corporation when the corporation itself failed to

enforce a right which may properly be asserted by it in court.’”

Id. (citations omitted). Accordingly, once the court has

characterized an action as direct or derivative under state law,

federal law determines whether the plaintiff has standing to

maintain the lawsuit. See Kona Enterprises, Inc. v. Estate of

Bishop, 51 F. Supp. 2d 1048, 1053 (D. Hawai‘i 1998); Johnson v.

Hui, 752 F. Supp. 909, 912 (N.D. Cal. 1990).

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Under California law, a corporation itself must bring an

action for an injury to the corporation. Sutter v. General

Petroleum Corp., 28 Cal. 2d 525, 529-530 (1946). If the

corporation filed suit, individual shareholders, officers and

directors are generally precluded from bringing suit for a wrong

done by a third person to the corporation. Id. If the corporation

does not act, a derivative suit may be brought by shareholders

and/or officers on the corporations’ behalf. Id.

If a stockholder suffered injuries that are separate and distinct

from those injuries suffered by the corporation, in some

circumstances, both the corporation and individual may bring suit.

Id.

A suit is derivative “if the gravamen of the complaint is

injury to the corporation, or to the whole body of its stock and

property without any severance or distribution among individual

holders, or it seeks to recover assets for the corporation or to

prevent the dissipation of its assets.” Sole Energy Co. v.

Petrominerals Corp., 128 Cal. App. 4th 212, 228 (2005) citing Jones

v. H.F. Ahmanson & Co., 1 Cal.3d 93, 106-107 (1969). “The

stockholder's individual suit, on the other hand, is a suit to

enforce a right against the corporation which the stockholder

possesses as an individual.” Sole Energy, 128 Cal. App. 4th at

228.

If a suit is determined to be derivative and is in federal

court, Federal Rule of Civil Procedure 23.1 governs. See Wright

& Miller, 7C Federal Practice & Procedure, § 1824 at 311 (1972)

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(“Rule 23.1 . . . [has] been deemed to apply not only to actions

originally brought in a federal court but also to actions removed

from a state tribunal.”) Rule 23.1 provides in pertinent part:

In a derivative action brought by one or more shareholders or

members to enforce a right of a corporation or of an

unincorporated association, the corporation or association

having failed to enforce a right which may properly be

asserted by it, the complaint shall be verified and shall

allege (1) that the plaintiff was a shareholder or member at

the time of the transaction of which the plaintiff complains

or that the plaintiff's share or membership thereafter

devolved on the plaintiff by operation of law, and (2) that

the action is not a collusive one to confer jurisdiction on

a court of the United States which it would not otherwise

have. The complaint shall also allege with particularity the

efforts, if any, made by the plaintiff to obtain the action

the plaintiff desires from the directors or comparable

authority and, if necessary, from the shareholders or

members, and the reasons for the plaintiff's failure to

obtain the action or for not making the effort.

Fed. R. Civ. P. 23.1. 

b. Whether Pending Suit Is Derivative

In the pending case, Jimenez and CUSA are the two named

plaintiffs. The complaint asserts each of the eleven causes of

action by both CUSA and Jimenez. As to Jimenez, the complaint

states as follows: “Plaintiff Mike Jimenez is a member of

Corrections USA. Jimenez is a Board of Directors Director [sic]

of Corrections USA and is the incorporator of Corrections USA.

Jimenez is duly authorized by the Board of Directors of Correction

USA [sic] and brings this action in his representative capacity on

behalf of the members Corrections USA.” Compl. ¶ 2. The

complaint provides that CUSA is a corporation within the meaning

of California Corporations Code § 7110.

Here, CUSA brings suit on its own behalf. Specifically, CUSA

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 Cal. Corp. Code § 7142 provides: 1

Notwithstanding Section 7141, in the case of a

corporation holding assets in charitable trust, any of the

following may bring an action to enjoin, correct, obtain

damages for or to otherwise remedy a breach of the charitable

trust:

(1) The corporation, or a member in the name of the

corporation pursuant to Section 7710.

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alleges that defendants breached their fiduciary duties and

converted CUSA funds and property for personal use and to create

the two new organizations. Jimenez asserts that he is proceeding

in his capacity as a representative of CUSA members and asserts the

same claims as CUSA. The complaint fails, however, to allege how

Jimenez – or CUSA members – have been harmed in a manner that is

not derivative of the harms suffered by the corporation. To the

extent that Jimenez is bringing suit, he is attempting to bring a

derivative suit, as “the gravamen of the complaint is injury to the

corporation.” Sole Energy Co., 128 Cal. App. 4th at 228.

Since CUSA itself filed suit, the interests of the CUSA

members are, theoretically, protected. Had CUSA not filed suit,

Jimenez could have, in that circumstance, filed a derivative

action. However, given that CUSA has filed suit, Jimenez has no

grounds to also bring a derivative suit. 

In their opposition, plaintiffs aver that there is a special

exception for charitable corporations. Plaintiffs maintain that

CUSA is a charitable corporation and that pursuant to California

Corporations Code § 7142, Jimenez, as an officer and member, may

in fact bring suit.1

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(2) An officer of the corporation.

(3) A director of the corporation.

(4) A person with a reversionary, contractual, or property

interest in the assets subject to such charitable trust.

(5) The Attorney General, or any person granted relator

status by the Attorney General.

The Attorney General shall be given notice of any action

brought by the persons specified in paragraphs (1) through

(4), and may intervene.

Cal. Corp. Code § 7142.

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The section of the Corporations Code cited to by plaintiffs

fails to establish that there is in fact grounds for Jimenez to

bring suit when CUSA is also a named plaintiff. California

Corporations Code § 7142 simply states that a director or officer

may bring suit – it does not state that a corporation and an

officer may both bring suit. 

Even if there were some sort of exception for charitable

corporations or corporations holding assets in charitable trusts,

plaintiffs’ complaint fails to allege that CUSA is in fact a

charitable corporation. Only in their opposition brief do

plaintiffs allege that they meet the criteria for a charitable

organization. See Pls.’ Opp’n at 7-8. Moreover, plaintiffs fail

to cite to any case law which states that a non-profit mutual

benefit corporation may be characterized as a “charitable

corporation” under California law. 

The California Supreme Court set forth the definition of a

charitable corporation: 

A charitable corporation is one created for or devoted to

charitable purposes. Charitable purposes include (a) the

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relief of poverty; (b) the advancement of education; (c) the

advancement of religion; (d) the promotion of health; (e)

governmental or municipal purposes; (f) other purposes the

accomplishment of which is beneficial to the community. The

common element of all charitable purposes is that they are

designed to accomplish objects which are beneficial to the

community.

Lynch v. Spilman, 67 Cal. 2d 251, 261. (1967). While CUSA may be

a charitable corporation under this definition, plaintiffs have

failed to pled as much in their complaint. Stating that CUSA is

non-profit mutual benefit corporation does not therefore mean that

the court can characterize CUSA as charitable. Under California

law, “[t]he particular sections under which the corporation was

formed is not conclusive on the issue of whether a corporation is

charitable or not.” Younger v. Wisdom Society, 121 Cal. App. 3d

683, 690 (1981). Put simply, the complaint is silent as to how

CUSA’s purpose is charitable. Accordingly, plaintiff's attempt to

avail himself of any charitable corporation exception to the

general rules governing derivative suits fails.

Given that CUSA is a named plaintiff in this case and that the

complaint sets forth no basis for a “charitable corporations”

exception to the rules governing derivative suits, plaintiff

Jimenez does not have standing to bring either a direct or

derivative suit. Plaintiffs will, however, be granted leave to

file an amended complaint. 

2. Plaintiffs’ First, Second, Third, Fourth, Seventh and

Ninth Causes of Action

Defendant seeks to dismiss plaintiffs’ claims which are based

on state statutes that do not create private rights of action.

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Defendant argues that plaintiffs’ first, second, third, fourth,

seventh and ninth causes of action either rely exclusively on or

partially on provisions of the California Corporations Code which

do not provide for private rights of action. Accordingly,

defendant asserts that these claims should be dismissed for failure

to state a claim. For the reasons discussed herein, the court only

dismisses claims two, three and four.

a. Applicable Law 

As a general matter, where a statute does not explicitly

provide for a private action, the proponent must show that the

legislature intended to create such a right. See, e.g.,

Agricultural Ins. Co. v.Super. Ct., 70 Cal. App. 4th 385, 399-400

(1999). If the legislature intends to create a private cause of

action, courts generally assume it will do so “directly [,]. . .

in clear, understandable, unmistakable terms. . . .” Moradi-Shalal

v. Fireman's Fund Ins. Companies, 46 Cal. 3d 287, 295 (1988).

Moreover, "when neither the language nor the history of a statute

indicates an intent to create a new private right to sue, a party

contending for judicial recognition of such a right bears a heavy,

perhaps insurmountable, burden of persuasion." Crusader Ins. Co.

v. Scottsdale Ins. Co., 54 Cal. App. 4th 121, 133 (1997).

That said, even if the statute at issue does not provide for

a private right of action, plaintiffs’ claims should not

automatically be dismissed. Under the liberal rules of federal

practice, dismissal under Federal Rule of Civil Procedure 12(b)(6)

is proper “only where there is no cognizable legal theory or an

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absence of sufficient facts alleged to support a cognizable legal

theory.” Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A

plaintiff’s “complaint is not to be dismissed because the

plaintiff's lawyer has misconceived the proper legal theory of the

claim, but is sufficient if it shows that the plaintiff is entitled

to any relief which the court can grant, regardless of whether it

asks for the proper relief.” United States v. Howell, 318 F.2d

162, 166 (9th Cir. 1963). As the Supreme Court recently

explained, however, “[w]hile a complaint attacked by a Rule

12(b)(6) motion to dismiss does not need detailed factual

allegations, a plaintiff's obligation to provide the ‘grounds’ of

his ‘entitle [ment] to relief’ requires more than labels and

conclusions, and a formulaic recitation of the elements of a cause

of action will not do.” Bell Atlantic Corp. v. Twombly, –- U.S. --

 2007 WL 1461066 *8 (2007) (citations omitted). In Bell, the

Supreme Court held that a dismissal for failure to state a claim

does not require an appearance, beyond a doubt, that a plaintiff

can prove no set of facts in support of claim that would entitle

him to relief. Id. at *10. This holding abrogates the well-known

holding in Conley v. Gibson that, “a complaint should not be

dismissed for failure to state a claim 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.” 355 U.S. 41, 45-46

(1957).

With this in mind, the court turns to the claims that

defendant contests.

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Cal. Corp. Code § 7231 is entitled “performance of 2

duties; degree of care; reliance on reports, etc.; good faith;

15

b. Plaintiffs’ First, Seventh and Ninth Causes of Action

Plaintiffs’ first, seventh and ninth claims sufficiently state

a cause of action on which relief could be granted. Although the

claims make reference to provisions in the California Corporations

Code which do not provide for private rights of action, common law

claims are also asserted and accordingly, these claims present

cognizable legal theories.

Moreover, the code is by no means irrelevant just because it

does not provide for a private right of action. Courts frequently

look to statutes to determine appropriate standards of conduct.

As Justice Roger J. Traynor so eloquently stated: 

A judge’s responsibility is the greater now that legislatures

fabricate laws in such volume. The endless cases that

proceed before him increasingly involve the meaning or

applicability of a statute, or on occasion, its

constitutionality. . . .Except for constitutional

limitations, legislators innovate them with a freedom unknown

to judges, who must ordinarily stay within the confines of

precedent and articulate the reasons for their rules. A

statute may be a fat code or a thin paragraph or a starving

sentence. It may cast a heavy shadow on the common law or a

light one, or it may idly plane until some incident sends it

careening into action. The hydraheaded problem is how to

synchronize the unguided missiles launched by legislatures

with a going system of common law. 

Roger J. Traynor, Statutes Revolving in Common Law Orbits, 43 State

Bar Journal 509, 531 (1968). 

Plaintiffs’ first cause of action is entitled, “Breach of

Fiduciary Obligations and Duties, California Corporations Code §

7231 and Common Law Breach of Fiduciary Duty.” Compl. ¶ 58-70.2

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exemption from liability” and sets forth the duties of directors.

There is no indication that this section of the Corporations Code

creates a private right of action. 

 Cal. Corp. Code § 8816 provides: 3

Every person who, without being authorized so to do,

subscribes the name of another to or inserts the name of

another in any prospectus, circular or other

advertisement or announcement of any corporation,

whether existing or intended to be formed, with intent

to permit the document to be published and thereby to

lead persons to believe that the person whose name is so

subscribed is an officer, agent or promoter of such

corporation, when in fact no such relationship exists to

the knowledge of such person, is guilty of a

misdemeanor.

Cal. Corp. Code § 8816.

16

As the title of the claim suggests, this cause of action alleges

that defendants breached their fiduciary duties by self-dealing and

misappropriating CUSA funds and property for personal use. Compl.

¶ 65. The claim also alleges that CUSA funds and property were

used to “found and operate ACO and ACOIN.” Compl. ¶ 66.

Plaintiffs do not dispute that California Corporations Code § 7231

does not create a private right of action, however, plaintiffs are

not relying exclusively on this provision to state their claim.

Rather, plaintiffs are bringing what appears to be a common law

claim for breach of fiduciary duty. Merely including reference to

the California Corporations Code § 7231 does not, in and of itself,

justify dismissal of the claim. 

Plaintiffs’ seventh cause of action is entitled, “Unauthorized

use of another’s name, California Corporations Code § 8816 and

Common Law.” Compl. ¶ 142-154. In this claim, plaintiffs allege 3

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 California Corporations Code § 8814 provides: 4

Fraudulent acquisition of corporate property; falsification

of books, records or documents

(a) Every director, officer or agent of any corporation, who

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that defendants used CUSA’s “name, trademark rights, and

promotional items, including but not limited to, $80,000 worth of

CUSA hats, jackets, t-shirts, pins, sweat shirts . . .” Compl. ¶

148. Plaintiffs allege that defendants are using this property to

create and “promote a rival organizations [sic] with the intent to

confuse and lead others to believe that they are authorised by CUSA

to do [sic] and are affiliate [sic] with CUSA.” Compl. ¶ 151.

As a result, plaintiffs allege that they were deprived of their

name and property and have suffered economic damages as a result.

Compl ¶ 152.

Plaintiffs do not dispute that California Corporations Code

§ 8816 does not provide for a private right of action. That said,

a claim should only be dismissed if there is no cognizable legal

theory upon which relief could be granted. Here, plaintiffs have

set forth sufficient facts which could establish a cause of action

for invasion of privacy, trademark infringement, or breach of the

implied covenant of good faith and fair dealing, among other

conceivable tort and/or contacts claims. 

Finally, plaintiffs’ ninth cause of action is labeled, “Fraud

and Concealment of Material Facts Fraudulent; Acquisition of

corporate property, California Code § 8814 and Common Law Fraud.”

Compl. ¶ 171-186. In this cause of action, plaintiffs allege 4

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knowingly receives or acquires possession of any property of

the corporation, otherwise than in payment of a just demand,

and, with intent to defraud, omits to make, or to cause or

direct to be made, a full and true entry thereof in the books

or accounts of the corporation is guilty of a crime.

(b) Every director, officer, agent or member of any

corporation who, with intent to defraud, destroys, alters,

mutilates or falsifies any of the books, papers, writings or

securities belonging to the corporation or makes or concurs

in omitting to make any material entry in any book of

accounts or other record or document kept by the corporation

is guilty of a crime.

(c) Each crime specified in this section is punishable by

imprisonment in state prison, or by imprisonment in a county

jail for not exceeding one year, or a fine not exceeding one

thousand dollars ($1,000), or both such fine and

imprisonment.

Cal. Corp. Code § 8814. 

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that defendants acted fraudulently when they falsified records and

granted themselves stipends and wages to which they were not

entitled. See Compl. ¶ 173-174. Plaintiffs also allege that

defendants misused CUSA credit cards and made misrepresentations

to the CUSA Board of Directors about CUSA’s finances. Compl. ¶

176 & 181.

As with plaintiffs’ first and seventh claims, California

Corporations Code § 8814 does not provide for a private right of

action. However, mere mention of this provision does not justify

dismissal of the claim. While the complaint could be clearer,

plaintiffs’ ninth cause of action sets out allegations which could

provide the basis for a claim of common law fraud. Namely,

plaintiffs allege that defendants acted fraudulently when they used

CUSA funds and property for personal gain and to create the two new

organizations.

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 Cal. Corp. Code § 7233 is entitled “Conflicts of interest; 5

disclosure; common directorships; just and reasonable contracts”

and sets forth the types of conflicts of interest that may arise

in a corporate setting. 

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Given that these claims are based on common law causes of

action, dismissal is not warranted or justified. Accordingly, the

court denies defendant’s motion to dismiss claims one, seven and

nine.

c. Plaintiffs’ Second, Third and Fourth Causes of Action 

Unlike the claims discussed above, plaintiffs’ second, third

and fourth causes of action make reference only to sections of the

California Corporations Code which do not create private rights of

action. These causes of action fail to set forth factual

allegations which “raise a right to relief above the speculative

level.” Bell Atlantic Corp., --- U.S. ----, 2007 WL 1461066 *8

(2007).

Plaintiffs’ second cause of action is entitled “Conflict of

Interest, Cal. Corp. Code § 7233.” Plaintiffs appear to allege

that defendants acted under a conflict of interest when they failed

to disclose to CUSA the extent to which they were using CUSA funds

and property. See Compl. ¶ 71-84. Defendant asserts, and

plaintiffs do not contest, that California Corporation Code § 7233

does not provide for a private right of action. It is not 5

entirely clear under what alternative legal theory plaintiffs could

assert a claim for “conflict of interest.” Perhaps the allegation

that defendants were acting under a conflict of interest is

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California Corporations Code § 7235 is entitled, “Loans 6

or guarantees of obligations of director or officer; advances for

expenses; exceptions” and sets forth the circumstances under which

a corporation may make loans.

California Corporations Code § 8320 is entitled, “Books 7

and records” and sets forth the type of records that a corporation

must keep. Section 8813 is entitled, “False financial reports or

statements; failure to make book entries or post notices” and sets

forth the grounds upon which a director or officer may be found

guilty of a crime. 

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subsumed in plaintiffs’ claims for breach of fiduciary duty, fraud

or interference with prospective business relations and economic

advantage. Although the court should not dismiss a claim when the

“plaintiff's lawyer has misconceived the proper legal theory”

Howell, 318 F.2d at 166, it is also not the court’s responsibility

to hypothesize as to all possible legal theories under which a

plaintiff could proceed. Accordingly, plaintiffs’ second cause of

action is dismissed with leave to amend.

Plaintiffs’ third and fourth causes of action suffer similar

flaws. The third claim is entitled “Prohibited advances for

expenses, loan, obligations, and guarantees of director, California

Corporations Code § 7235.” The fourth cause of action is entitled 6

“Falsification and Failure to Keep Adequate Books and Records,

California Corporations Code §§ 8320 and 8813.” Defendant 7

asserts, and plaintiffs do not dispute, that these provisions of

the Code do not provide for private rights of action. Moreover,

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the allegations in both claims are essentially that defendants

breached their fiduciary duties when they used CUSA funds and

property. Plaintiffs already assert a claim for breach of

fiduciary duty and accordingly, it is not clear if there is an

independent and cognizable legal theory on which plaintiffs could

proceed. For these reasons, plaintiffs’ third and fourth claims

are dismissed with leave to amend.

3. Plaintiffs’ Sixth Cause of Action

Defendant asks that plaintiffs’ sixth cause of action be

dismissed for failure to state a claim for interference with

prospective business relations and economic advantage. See Def.’s

Mot. to Dis. at 7. For the reasons discussed herein, defendant’s

motion with respect to plaintiffs’ sixth cause of action is denied.

A claim for intentional interference with prospective economic

advantage involves the following elements: “(1) an economic

relationship between the plaintiff and some third party, with the

probability of future economic benefit to the plaintiff; (2) the

defendant's knowledge of the relationship; (3) intentional acts on

the part of the defendant designed to disrupt the relationship; (4)

actual disruption of the relationship; and (5) economic harm to the

plaintiff proximately caused by the acts of the defendant.” Korea

Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1153 (2003).

Here, plaintiffs set forth sufficient factual allegations to

support their claim for interference with economic advantage.

Specifically, plaintiffs allege that defendants had a relationship

with CUSA members and certain businesses with whom CUSA worked.

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Compl. ¶ 136-137. Plaintiffs claim that defendants knew of these

contacts and allegedly “instructed CUSA business contacts, vendors,

members, correctional officer associations, and correctional

members . . . to not do business with CUSA.” Comp. ¶¶ 132, 133,

136. According to plaintiffs, “CUSA business contacts have

received correspondence, e-mails, and phone calls from [defendants]

instructing them to not do business with CUSA.” Compl. ¶ 137. As

a result of defendants’ actions, plaintiffs claim that they have

been deprived of membership dues and service fees and as a result

have suffered financially. These factual allegations are

sufficient to state a cause of action for intentional interference

with prospective economic advantage. Accordingly, defendant’s

motion to dismiss plaintiffs’ sixth cause of action is denied.

4. Plaintiffs’ Tenth Cause of Action 

Defendant also seeks dismissal of plaintiffs’ tenth cause of

action on the grounds that it fails to state a claim for

conversion. Defendant avers that in making a claim for conversion,

California law requires that a plaintiff allege with specificity

the amount that was allegedly converted. Def.’s Mot. to Dis. at

8, citing Vu v. Calif. Commerce Club, 58 Cal. App. 4th 229, 235

(1997). Contrary to defendant’s contention, plaintiffs do in fact

allege with specificity the amount converted. See Comp. ¶¶ 25,

26, 27, 35, 36, 37, 47, 48, 52, 54, and 55. Although these amounts

are not specifically mentioned in plaintiffs’ tenth cause of

action, plaintiffs’ tenth cause of action states that it

incorporates by reference paragraphs one through 186. For these

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reasons, defendant’s motion to dismiss plaintiffs’ tenth cause of

action is DENIED.

B. Defendant’s Motion to Strike & Motion for a More Definite

Statement 

Defendant moves to strike plaintiffs’ complaint in its

entirety. Defendant avers that the complaint is “replete with

redundant and immaterial allegations.” Def.’s Mot. Dis. at 9. 

Federal Rule of Civil Procedure 12(f) authorizes the court to

strike from any pleading “any redundant, immaterial, impertinent,

or scandalous matter.” Fed. R. Civ. P. 12(f). Motions to strike

are viewed with disfavor, and will usually be denied unless the

allegations in the pleading have no possible relation to the

controversy, and may cause prejudice to one of the parties. See

5A C. Wright & A. Miller, Federal Practice and Procedure, § 1380

(3d ed. 2004). While this complaint totals forty pages and, at

times, is unclear and repetitive, defendant has failed to establish

which allegations have no possible relation to the controversy.

Defendant also fails to explain how the “redundant and immaterial”

allegations may cause prejudice. Accordingly, the motion to strike

is denied.

Defendant also moves for a more definite statement pursuant

to Federal Rule of Civil Procedure 12(e). Federal Rule of Civil

Procedure 12(e) provides: “If a pleading to which a responsive

pleading is permitted is so vague or ambiguous that a party cannot

reasonably be required to frame a responsive pleading, the party

may move for a more definite statement before interposing a

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responsive pleading.” Fed. R. Civ. P. 12(e). “The situations in

which a Rule 12(e) motion is appropriate are very limited.” 

See 5A C. Wright & A. Miller, Federal Practice and Procedure, §

1377 (3d ed. 2004).

Defendant seeks a more definite statement as to plaintiffs’

first, fourth, seventh, and ninth causes of action. As discussed

above, plaintiffs’ fourth cause of action is dismissed with leave

to amend. With respect to the other causes of action, defendant

is essentially seeking a more definite statement of the legal

theory under which plaintiffs are proceeding. However, absent

special circumstances, a Rule 12(e) motion cannot be used to

require the pleader to set forth “the statutory or constitutional

basis for his claim, only the facts underlying it.” McCalden v.

California Library Ass'n, 955 F.2d 1214, 1223 (9th Cir. 1990).

Here, plaintiffs have set forth forty pages of factual allegations.

The factual allegations of the complaint are relatively straight

forward and through discovery, the issues and claims will no doubt

be narrowed and refined. Accordingly, defendant’s motion for a

more definite statement is denied.

IV.

CONCLUSION

1. Defendant’s motion to dismiss, to strike and for a more

definite statement, is granted in part and denied in

part. 

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2. Plaintiffs’ are granted thirty days from the date of

 this order to file an amended complaint. 

IT IS SO ORDERED. 

DATED: May 29, 2007.

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