Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-07949/USCOURTS-cand-4_06-cv-07949-2/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1332 Diversity-Personal Property

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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

GIA-GMI, LLC, a Florida Limited Liability

Company,

Plaintiff,

v.

DANIEL R. MICHENER, an individual,

JAMES M. MCWALTERS, an individual,

CHARLES D. TOY, an individual, ALLAN

M. DUNN, an individual, LARRY J.

AUSTIN, an individual, W. DENMAN VAN

NESS, an individual, MICHAEL P.

SALUCCI, an individual, COMPUTER AND

SOFTWARE ENTERPRISES, INC., a

California corporation, PANGAEA

HOLDINGS, LLC, a dissolved Delaware

limited liability company, and PANGAEA

TRADING CORPORATION, a Delaware

corporation

Defendants.

_______________________________________

No. C 06-7949 SBA 

ORDER

[Docket Nos. 41 & 43] 

This matter comes before the Court on counterclaim defendant J. Richard Blankenship’s Motion

to Dismiss the First Amended Counterclaim [Docket No. 43] and Motion to Strike Allegations from

the Amended Counterclaim [Docket No. 41]. Having read and considered the arguments presented by

the parties in the papers submitted to the Court, the Court finds this matter appropriate for resolution

without a hearing. The Court hereby GRANTS Blankenship’s Motion to Dismiss and DENIES AS

MOOT the Motion to Strike.

BACKGROUND

Plaintiff, GIA-GMI, LLC initiated this action against defendants on December 29, 2006, alleging

claims for fraud, violations of Florida and Federal securities law, breach of fiduciary duty, and successor

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liability, all related to a loan by GIA-GMI to GMI Capital Corporation (“GMICC”), a now defunct

company. On March 30, 2007, certain of the defendants filed their First Amended Counterclaim

(“FAC”) against J. Richard Blankenship as an individual.

The Defendants asserting the Amended Counterclaim are the former officers and directors of

GMICC. Blankenship is the managing member of GIA-GMI, the plaintiff in this action. Defendants’

Amended Counterclaim asserts claims for Negligent Misrepresentation and Intentional

Misrepresentation. Both claims are based on the same alleged representations made by Blankenship that

he would cause GIA-GMI to convert the debt GMICC owed to GIA into an equity investment in

GMICC, which he ultimately failed to do. FAC, ¶ 31-41.

Defendants allege that in January 2004, Blankenship sought to invest in GMICC. Michener Decl.

¶ 3. Blankenship ultimately invested $750,000 in GMICC through a Florida LLC he formed called

GIA-GMI, LLC (the plaintiff in the underlying action) and his investment took the form of a promissory

note convertible to shares in GMICC (the “Note”). Id., ¶ 5. 

However, as of September 2004, GMICC was greatly in need of additional cash and was making

strenuous efforts to attract new investors. Id., ¶ 34. A major obstacle to this goal was GMICC’s liability

to GIA-GMI, LLC on the Note. Id. Accordingly, defendants and counterclaim plaintiffs Dunn,

Michener, Toy, Austin, Van Ness and Salucci discussed with Blankenship the possibility of GIA-GMI,

LLC’s exercising its rights under the Note to convert its debt into stock in GMICC. Id.

The crux of defendants’ counterclaim is that on October 21, 2004, in reliance on Blankenship’s

representations that he would cause the debt to be converted to stock in GMICC, Mr. Van Ness

deposited $10,000 into GMICC’s bank account and Salucci deposited $25,000 into the same account;

on October 29, 2004, Austin deposited $25,000 into a GMICC bank account; and on November 1, 2004,

Mr. Dunn deposited $20,000 into that account as well. Id., ¶ 50. 

On October 27, 2004, Blankenship executed a written agreement by which he agreed that

GIA-GMI, LLC would convert the principal amount of the Note of $750,000 into 1,609,118 shares of

GMICC common stock. Blankenship, however, subsequently refused to convert the Note to stock as

promised, explaining that he was unable to do so because of fiduciary obligations to the trusts and

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pension and profit sharing plans from which he had taken the money he invested in GMICC. Defendants

assert that Blankenship, either willfully or negligently, falsely represented that he had authority to

convert the debt from GMICC into stock in the company, thereby rendering all of counterclaimants’

investments in GMICC worthless. Id., ¶ 57.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss should be granted if the

plaintiff is unable to articulate “enough facts to state a claim to relief that is plausible on its face.” Bell

Atlantic Corp. v. Twombly, 127 S.Ct. 1955,1960 (2007). For purposes of such a motion, the complaint

is construed in a light most favorable to the plaintiff and all properly pleaded factual allegations are

taken as true. Jenkins v. McKeithen, 395 U.S. 411, 421 (1969); Everest & Jennings, Inc. v. American

Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir. 1994). All reasonable inferences are to be drawn in favor

of the plaintiff. Jacobson v. Hughes Aircraft, 105 F.3d 1288, 1296 (9th Cir. 1997). 

The court does not accept as true unreasonable inferences or conclusory legal allegations cast

in the form of factual allegations. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981);

see Miranda v. Clark County, Nev., 279 F.3d 1102, 1106 (9th Cir. 2002) (“[C]onclusory allegations of

law and unwarranted inferences will not defeat a motion to dismiss for failure to state a claim.”);

Sprewell v. Golden State Warriors, 266 F.3d 979, 987 (“Nor is the court required to accept as true

allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.”),

as amended by, 275 F.3d 1187 (9th Cir. 2001).

ANALYSIS

I. Motion to Dismiss

Blankenship’s motion to dismiss asserts four separate bases for dismissal: (1) that he is not an

“opposing party” for purposes of Federal Rule of Civil Procedure Rule 13, and therefore a counterclaim

cannot be asserted against him and defendants must instead file a separate lawsuit; (2) that he is not

subject to personal jurisdiction in California and that venue is not proper in this court; (3) that the

negligent misrepresentation claim fails as a matter of law; and (4) that the intentional misrepresentation

claim is not alleged with the requisite particularity required by Federal Rule of Civil Procedure 9(b). The

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Court has determined that the motion to dismiss should be granted because Blankenship is not an

“opposing party” within the meaning of Rule 13, and Blankenship’s argument is analyzed as follows.

Blankenship argues that the FAC must be dismissed because he is not an “opposing party” in

this action as is required for the assertion of a counterclaim under Rule 13. Rule 13(a), addressing

compulsory counterclaims, provides that a pleading “shall state as a counterclaim any claim which ...

the pleader has against any opposing party” (emphasis added). Similarly, Rule 13(b), addressing

permissive counterclaims, provides that a pleading “may state as a counterclaim any claim against an

opposing party ...” (emphasis added). Thus, Rule 13 provides that a counterclaim may be asserted only

against an “opposing party.” Id. 

This action was brought by plaintiff GIA-GMI, LLC, a Florida limited liability company. While

Blankenship is the managing member of GIA-GMI, he is not a named plaintiff in this action. Defendants

and counterclaim plaintiffs argue that Blankenship, as the managing member of GIA-GMI, is “so closely

identified” with GIA-GMI that he is “functionally identical” to it, and therefore qualifies as an“opposing

party” under Rule 13(a), citing Transamerica Occidental Life Ins. Co. v. Aviation Office of Am., Inc.,

292 F.3d 384, 390 (3d Cir. 2002).

In Transamerica, the defendant was sued by two plaintiff entities in Texas, and, rather than filing

counterclaims against two other entities affiliated with the plaintiffs in Texas, the defendant filed a

separate suit against them in New Jersey. The district court in New Jersey, however, dismissed the

second action, ruling that the defendant’s claims were barred because they were not asserted as

mandatory counterclaims in the Texas case. On appeal, the Third Circuit affirmed, holding that “where

parties are functionally equivalent as in [Avemco Insurance Co. v. Cessna Aircraft Co., 11 F.3d 998

(10th Cir. 1993)], where an unnamed party controlled the litigation, or where, as in [Banco Nacional

de Cuba v. First Nat'l City Bank, 478 F.2d 191, 192 (2d Cir. 1973)], an unnamed party was the alter ego

of the named party, they should be treated as opposing parties within the meaning of Rule 13.” Id. at

391. The court held that an assignee of the contractual rights that were the basis of litigation and who

in fact instituted the litigation on behalf of the assignors was the functional equivalent of the assignors.

Id. at 392 (“Thus, by virtue of the assignment, the rights that are at stake in the Texas litigation are

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actually [the assignee’s] rights, not [the assignors], and this is the reason why [the assignee] is

conducting the litigation in the Texas action.”).

As an initial matter, assuming the Third Circuit’s analysis in Transamerica is correct, defendants

provide absolutely no argument that Blankenship is in fact “functionally equivalent” to GIA-GMI. They

do not assert, as was the case with the plaintiffs in Transamerica, that Blankenship is an “assignee of

the contractual rights that were the basis of litigation” or that he “in fact instituted the litigation on

behalf of the assignors.” Nor do they (nor the Third Circuit in Transamerica) provide any definition of

“functional equivalence.” However, in Banco Nacional, cited by the Third Circuit in connection with

its “functional equivalence” language, the Second Circuit treated a party not named in the litigation as

an opposing party after concluding that the parties were “one and the same for the purposes of th[e]

litigation.” 478 F.2d at 193 n. 1. The Court held that because the parties “acted as a single entity” and

because one was the alter ego of the other, both were “opposing parties” within the meaning of Rule 13.

Id.

While the facts alleged in the FAC demonstrate that Blankenship was closely involved with

GIA-GMI, there is no allegation in the FAC that Blankenship is “one and the same for the purposes of

this litigation,” controls this litigation on behalf of GIA-GMI, or is the alter ego of GIA-GMI. Thus,

neither Transamerica nor Banco Nacional support defendants’ argument that Blankenship is the

functional equivalent of GIA, even under the broad reading of “opposing party” espoused by those

courts.

The Ninth Circuit has not yet directly interpreted the scope of Rule 13’s “opposing party”

language. However, in Noel v. Hall 341 F.3d 1148, 1170 -1171 (9th Cir. 2003), a case involving

Washington state law, the Ninth Circuit noted that Washington courts have adopted a strict reading of

Rule 13(a)’s requirement that a pleader must bring compulsory counterclaims against “any opposing

party.” In Nancy's Product, Inc. v. Fred Meyer, Inc., 61 Wash. App. 645 (1991), the Washington appeals

court held that an opposing party for purposes Rule13(a) is “one who asserts a claim against the

prospective counterclaimant in the first instance,” i.e., a named plaintiff. Id. at 650 (“Words contained

in court rules which are not therein defined should, like statutory terms, be given their ordinary meaning

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. . . To interpret the term ‘opposing party’ in the context of the court rules so as to include a nonparty

with an adverse interest is a non sequitur.”). The Ninth Circuit held that the defendant in the

counterclaim in the case before it was “not a plaintiff--and thus not an opposing party” in the underlying

action and therefore the claims against him were not compulsory counterclaims. Noel, 341 F.3d at1170

-1171; see also William W Schwarzer, et al., California Practice Guide: Federal Civil Procedure Before

Trial § 8:262 (2007) (defining “opposing party” as “any party who has previously asserted a claim

against the counterclaimant”(emphasis in original)).

Whatever flaws Rule 13 may have, it at least has the virtue of clarity. The plain meaning of

“opposing party” is a party to the lawsuit -- that is, a named party who asserted a claim against the

counterclaimants. To accept the expansive definition of this term espoused by defendants would erode

the Rule’s clarity to the point that litigants would simply have to guess in each individual case whether

a court would determine that a potential defendant to a counterclaim is an “opposing party.” While other

Circuits have carved exceptions to this plain meaning in instances where there was no question that the

counterclaim defendant was in all salient legal respects identical to a named party, such is not the case

here. As noted above, defendants have not presented any argument that Blankenship is actually “one

and the same” as GIA-GMI, controls this litigation on behalf of GIA-GMI, or is the alter ego of GIAGMI, and therefore these exceptions do not apply.

Finally, defendants, all but conceding that Blankenship is not an “opposing party” within the

meaning of Rule 13, argue that dismissal under Rule 13 “gives nothing to either side; nor does it assist

the court.” Opp. at 9. Defendants admit that, if their counterclaim is dismissed, they are free to file their

claims against Blankenship as a separate lawsuit, and that such a lawsuit would likely be consolidated

with this case. Therefore, they argue, “dismissal under FRCP 13 would require counterclaimants to jump

through a procedural hoop for no meaningful reason.” Id.

Be that as it may, the Court is not free to extricate defendants from the obligation to jump

through “procedural hoops” prescribed by the Federal Rules simply because they make bringing claims

slightly more burdensome. Indeed, a primary Purpose of the Federal Rules is to reduce litigation. See,

e.g., Dill Mfg. Co. v. Acme Air Appliance Co., 2 F.R.D. 151, 153 (E.D.N.Y. 1941) (purpose of Federal

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Paragraph 12 of the Amended Counterclaim states: “12. A former investment banker,

Blankenship also served as the U.S. Ambassador to the Bahamas from 2001 to 2003, having been

appointed to this position by President Bush following the Bush-Gore election contest. News reports

had stated that Blankenship and Republican cronies had raised hundreds of thousands of dollars for the

Bush campaign, during which Blankenship's private jet had been made available to Florida Governor

Jeb Bush.”

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Rules of Civil Procedure is to reduce the amount of litigation, to narrow the issues, to avoid surprises,

and to promote justice). Accordingly, the First Amended Counterclaim should be dismissed.

II. Motion to Strike

In his Motion to Strike, Blankenship moves the Court to strike paragraph 12 from the Amended

Counterclaim as “obviously contentious,” “inflammatory,” and irrelevant.1 As the Court grants the

motion to dismiss on the grounds that Blankenship is not an “opposing party” for the purposes of Rule

13, the motion to Strike is denied as moot. 

CONCLUSION

For the foregoing reasons, IT IS HEREBY ORDERED THAT Blankenships’ Motion to Dismiss

the First Amended Counterclaim [Docket No. 43] is GRANTED. Blankenships’ Motion to Strike

Allegations from the Amended Counterclaim [Docket No. 41] is DENIED AS MOOT.

IT IS SO ORDERED.

 

Dated: 6/6/07 SAUNDRA BROWN ARMSTRONG

United States District Judge

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