Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_15-cv-00196/USCOURTS-caed-2_15-cv-00196-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 12:22 Securities Fraud

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

JOHN BALKOWITSCH and NANCY 

BALKOWITSCH, TRUSTEES OF THE 

JOHN R. BALKOWITSCH, III AND 

NANCY BOYESEN BALKOWITSCH 

2004 REVOCABLE INTER VIVOS 

TRUST; MADHU SHARMA; SEEMA 

SHARMA; and J. DOUGLAS MEADOR 

and LUANN MEADOR, TRUSTEES OF 

THE MEADOR TRUST DATED 

OCTOBER 8, 1999,

Plaintiffs,

v.

D&M DEVELOPMENT, INC.; JAMES 

DUSA; RYAN DUSA; NICHOLAS 

MICHELI; NORCAL GOLD, INC., 

dba RE/MAX GOLD; and DOES 1 

to 100, inclusive,

Defendants.

No. 2:15-cv-00196 JAM EFB

ORDER DENYING DEFENDANT 

MICHELI’S MOTION TO DISMISS

Defendant Nicholas Micheli (“Defendant Micheli”) moves to 

dismiss (Doc. #11) the second cause of action alleged in 

Plaintiffs John and Nancy Balkowitsch, Madhu and Seema Sharma, 

and Douglas and Luann Meador’s (“Plaintiffs”) complaint (Doc. 

#1). Plaintiffs oppose the motion (Doc. #16) and Defendant 

Micheli filed a reply (Doc. #17). For the following reasons, the 

Case 2:15-cv-00196-JAM-EFB Document 20 Filed 05/27/15 Page 1 of 7
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motion is denied. 1

I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND

In December 2003, Defendant Micheli and Defendant Ryan Dusa 

formed a corporation, Defendant D&M Development, Inc. (“D&M”). 

Compl. ¶ 16. Plaintiffs specifically allege that Defendant 

Micheli “serves as the President of D&M.” Compl. ¶ 16. 

Plaintiffs allege that they were each approached, separately, by 

Defendant Ryan Dusa and his brother, Defendant Jim Dusa, about 

“investing in West Horizon II Office Park located in Yuba City, 

California.” Compl. ¶¶ 18-19. Defendants Ryan and Jim Dusa 

allegedly made the following two misrepresentations in soliciting 

Plaintiffs’ investment: (1) they told Plaintiffs that they had 

“already identified tenants and purchasers of office space in the 

new project,” due to an adjacent building being at capacity; in 

fact, the adjacent property was “only 50% full at the time of 

these representations;” and (2) they told Plaintiffs that they 

themselves “had personally invested their own monies in West 

Horizon II;” in fact, they “did not make the capital investments 

in the project they represented they had made.” Compl. ¶¶ 19, 

20, 29. The development plan presented by Defendants Ryan and 

Jim Dusa called for D&M to develop the property and obtain the 

construction financing and development loan. Compl. ¶ 22. 

Relying on these representations, Plaintiffs each invested in the 

property. On August 7, 2009, “a Tenancy in Common Agreement 

 

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This motion was determined to be suitable for decision without 

oral argument. E.D. Cal. L.R. 230(g). The hearing was 

scheduled for May 6, 2015.

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. . . was entered into between D&M, Jim [Dusa], Rhonda Dusa, and 

Plaintiffs.” Compl. ¶ 23. Ultimately, the property was lost to 

foreclosure, and Plaintiffs lost their money. Compl. ¶ 34.

On January 23, 2015, Plaintiffs filed the Complaint, which 

includes the following causes of action: (1) violation of Section 

10(b) of the Securities Exchange Act; (2) violation of California 

Corporations Code § 25400, et seq.; (3) intentional 

misrepresentation; (4) negligent misrepresentation; (5) breach of 

contract; (6) breach of fiduciary duty against Defendants Jim 

Dusa, Ryan Dusa, and RE/MAX; and (7) breach of fiduciary duty 

against Defendants Jim Dusa, D&M, and Micheli. On March 23, 

2015, the parties reached a stipulation to dismiss (Doc. #12) 

without prejudice the first, fifth, and seventh causes of action 

against Defendant Micheli.

II. OPINION

Defendant Micheli argues that Plaintiffs’ second cause of 

action – for a violation of the California Corporations Code 

(“CCC”) § 25400 et seq. – is insufficiently pled against him 

individually. Mot. at 4. Specifically, Defendant Micheli argues 

that Plaintiffs fail to specifically “allege and show control 

and/or material assistance regarding the specifics of the alleged 

violation” by Defendant Micheli. Mot. at 6. Plaintiffs respond 

that, under the plain language of CCC § 25504, Defendant Micheli 

may be held liable based solely on his status as President of 

Defendant D&M. Opp. at 5. Thus, Plaintiffs argue, Plaintiffs’ 

allegation that Defendant Micheli was the President of Defendant 

D&M, alone, is sufficient to support their second cause of action 

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against the moving Defendant.

In its entirety, CCC § 25504 provides as follows:

Every person who directly or indirectly controls a 

person liable under Section 25501 or 25503, every 

partner in a firm so liable, every principal executive 

officer or director of a corporation so liable, every 

person occupying a similar status or performing similar 

functions, every employee of a person so liable who 

materially aids in the act or transaction constituting 

the violation, and every broker-dealer or agent who 

materially aids in the act or transaction constituting 

the violation, are also liable jointly and severally 

with and to the same extent as such person, unless the 

other person who is so liable had no knowledge of or 

reasonable grounds to believe in the existence of the 

facts by reason of which the liability is alleged to 

exist.

Cal. Corp. Code § 25504.

As relevant to Defendant Micheli’s motion, CCC § 25504 states

that “every principal executive officer or director of a 

corporation” liable under CCC § 25501 or CCC § 25503 “is also 

liable jointly and severally” with that corporation. (CCC

§ 25504 also provides an affirmative defense to a director who 

lacked knowledge of the underlying facts of the violation, but 

this affirmative defense is not relevant on Defendant Micheli’s 

motion to dismiss.) As one California court has held, “the plain 

language of section 25504 expressly subjects outside directors to 

collateral liability based solely on their status as directors, 

without requiring proof of control[.]” Hellum v. Breyer, 194 

Cal.App 4th 1300, 1314 (2011). Although liability for an

“employee of a person so liable” or a “broker-dealer or agent” is 

contingent upon a showing that the individual “materially aid[ed] 

in the act or transaction or transaction constituting the 

violation,” this limitation does not apply to the other 

categories enumerated in CCC § 25504, including directors. See

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Hellum, 194 Cal.App.4th at 1311 (noting that “qualifying words, 

phrases and clauses are to be applied to the words or phrases 

immediately preceding and are not to be construed as extending to 

or including others more remote”).

Importantly, there is no challenge to the sufficiency of 

Plaintiffs’ pleading with regard to Defendant D&M. Plaintiffs 

have adequately alleged Defendant D&M’s corporate liability under 

CCC § 25501, and have also specifically alleged that Defendant 

Micheli was the “President of D&M.” Compl. 16. Given the broad 

language of CCC § 25504 (“every principal executive officer or 

director of a corporation so liable”), Plaintiff’s allegations 

are sufficient to state a claim against Defendant Micheli. 

Contrary to Defendant’s position, Plaintiffs were not required to 

specifically allege facts showing that Defendant Micheli 

materially aided in the fraud. The cases relied upon by 

Defendant Micheli are inapplicable, as they do not concern the 

secondary liability of principal executive officers or directors

under CCC § 25504. See Mot. at 5 (citing Apollo Capital Fund, 

LLC v. Roth Capital Partners, LLC, 158 Cal.App.4th 226, 257 

(2007), which concerns the secondary liability of a broker-dealer 

under CCC § 25504).

Defendant Micheli’s attempt to criticize the reasoning in

Hellum is unpersuasive. See Reply at 2 (characterizing the 

analysis in Hellum as “a very stringent and technically 

grammatical interpretation of section 25504”). Hellum accurately 

describes and correctly applies the plain, unambiguous language 

of CCC § 25504. Defendant also argues that, “[i]n overly 

hitching itself to ‘the rules of grammar’ or other constrictive 

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and rigid readings of statutory expression opined in one case, 

other courts can inadvertently be lead [sic] down the road of 

imprudence, if not the chasm of inequity.” Reply at 4. Poetics 

aside, this argument mistakes the role of the Court in applying 

the plain language of a statute. As noted in Hellum:

Such an approach subordinates the statutory text to an 

individual judge's subjective interpretation of what 

is, and what is not, compelling public policy and is 

particularly inappropriate in a case such as this where 

the statute’s text is plain and unambiguous. (Murphy v. 

Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 

1103 [“‘If there is no ambiguity in the language, we 

presume the Legislature meant what it said and the 

plain meaning of the statute governs.’”].) Judicial 

deference to the policy choices enacted into law by the 

Legislature requires that statutory interpretation 

focus primarily on the language of the statute.

Hellum, 194 Cal.App.4th at 1314.

For precisely this reason, Defendant Micheli’s policy 

arguments are unavailing here.

Similarly unavailing is Defendant Micheli’s argument 

that Hellum’s rationale does not apply to this case because 

Defendant D&M was not the “primary violator.” Reply at 3. 

Implied in this argument appears to be Defendant Micheli’s 

position that, in this case, the “primary violator” was not 

Defendant D&M, but Defendants Jim and Ryan Dusa: that is, 

the corporation itself had less responsibility for the fraud 

than the individuals. While the Hellum court does describe 

the corporation as the “primary violator,” the meaning of 

this phrase is clear from the structure of CCC § 25400, et 

seq. As noted in Defendant Micheli’s own moving papers, 

“[t]he liability created by section 25501 is sometimes 

referred to as primary or direct because it applies to a 

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person who is directly or primarily responsible for 

violating section 25401 as a consequence of selling or 

buying securities by means of misrepresentations or 

omissions of material fact.” Mot. at 4 (citing Moss v. 

Kroner, 197 Cal.App.4th 860, 873 (2011)). Conversely, CCC 

§ 25504 provides for “secondary liability” of corporate 

directors (among others). Openwave Sys. Inc. v. Fuld, 2009 

WL 1622164, at *6 (N.D. Cal. June 6, 2009). Thus, a 

“primary violator” is not a defendant who bears main 

responsibility for the violation, but rather, a defendant 

whose conduct violates CCC § 25401. As noted above, the 

sufficiency of Plaintiffs’ pleading with regard to Defendant 

D&M is not challenged. Accordingly, Defendant D&M is as 

much a “primary violator” as was the corporation in Hellum.

III. ORDER

For the reasons set forth above, the Court DENIES Defendant 

Micheli’s motion to dismiss: 

IT IS SO ORDERED.

Dated: May 27, 2015

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