Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01632/USCOURTS-casd-3_15-cv-01632-2/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1441fr Removal- Fraud

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1 NOV 2 9 2016

2 CLERK. IJ.S. DiLTKiCI COURT

SOUTHERN fSCrtin > OT OCUTORNIA

3 BY DEPUTY

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8 UNITED STATES DISTRICT COURT

9 SOUTHERN DISTRICT OF CALIFORNIA

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11 ALBERT CALDERON, an individual on

behalf ofhimself and all others similarly

situated, et al.,

Case No.: 3:15-cv-01632-BEN-NLS

12 ORDER GRANTING DEFENDANT

MAINSTAR TRUST’S MOTION TO

DISMISS

13 Plaintiff,

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v.

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TOTAL WEALTH MANAGEMENT,

Inc. et al.,

[Docket Nos. 60]

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17 Defendant.

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Before this Court Defendant Mainstar Trust’s motion to dismiss, or stay pending

arbitration, the Third Amended Complaint (“TAC”). The motion is fully briefed. The

Court finds the Motion suitable for determination on the papers without oral argument,

pursuant to Civil Local Rule 7.1 .d. 1. For the reasons set for below, the motion is

GRANTED.

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Case 3:15-cv-01632-BEN-NLS Document 75 Filed 11/29/16 PageID.<pageID> Page 1 of 8
BACKGROUND1

Plaintiffs allege that investors were solicited to invest in Total Wealth Management

(“XWM”) and its affiliated companies, Altus Capital Opportunity Fund, LLC (“ACOF”)

and Altus Capital Portfolio Series (“ACPS”), primarily through a weekly radio program,

financial awareness seminars, and community engagement. Investors were allegedly

misled into believing their funds were being safely invested based on investment

portfolio risk when in fact, investments were being channeled primarily to Private

Placement Capital Notes LLC II (“PPCN”), LJL Secured High Yield Income Fund I,

LLC (“LJL”), and Aegis Retail Group LLC (“AEGIS”) in exchange for fees paid by the

entities, without disclosure to investors.

Mainstar Trust (“Mainstar”), formerly named First Trust Company ofOnaga

(“FTCO”), is a trust company chartered in the State ofKansas. FTCO provided custodial

services for various self-directed investment retirement accounts (“IRAs”), including

Traditional, Roth, and other retirement trusts. Plaintiffs allege that, in July 2009,

Defendant Cooper, through TWM, arranged to have FTCO serve as the IRA, Roth IRA,

and Trust custodians for TWM’s investment advisory investors, including Plaintiffs.

Plaintiffs further allege that FTCO managers Jean Meyer and Jodi Weber agreed to a fee

sharing arrangement with Cooper through TWM, whereby TWM provided FTCO with

clients in exchange for monetary consideration, which are prohibited transactions under

Internal Revenue Code § 4975.

Plaintiffs assert these facts give rise to claims against FTCO (now Mainstar) for:

(1) suppression ofmaterial facts under Civil Code § 1710; (2) aiding and abetting

suppression ofmaterial fact; and (3) aiding and abetting breach offiduciary duty.

Mainstar alleges some ofthe named Plaintiffs’ claims are subject to a mandatory

arbitration provision provided in each ofthe identified Plaintiffs IRA Custodian

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The following overview ofthe facts are drawn from the allegations ofthe TAC. The Court is not

making findings offact.

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Case 3:15-cv-01632-BEN-NLS Document 75 Filed 11/29/16 PageID.<pageID> Page 2 of 8
Agreement (collectively, “the IRA Agreements”) with Mainstar2. (Mot. at 3:9-12.) The

arbitration provisions state3:

Arbitration ofClaims: Any controversy arising out of or relating

to this Agreement or the breach thereof, or to the IRA or any

transaction authorized by you and/or your agent, shall be settled

by arbitration in Johnson County, Kansas according to the rules

ofThe American Arbitration Association. Arbitration is final and

binding on the parties. The Parties are waiving their right to seek

remedies in court, including the right to jury trial. The prearbitration discovery is generally more limited than and different

from court proceedings.

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(Mot. at 3:13-19, Docket Nos. 60-2 110.) Plaintiffs do not dispute that the IRA

Agreements contain an arbitration clause or discuss whether their claims are subject to

the clause’s provisions. Instead, Plaintiffs challenge the validity and/or enforceability of

the IRA Agreements in their entirety.

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14 LEGAL STANDARD

Section 2 ofthe Federal Arbitration Act (“FAA”) states that:

A written provision in any ... contract evidencing a transaction

involving commerce to settle by arbitration a controversy

thereafter arising out of such contract or transaction ... shall be

valid, irrevocable, and enforceable, save upon such grounds as

exist at law or in equity for the revocation of any contract.

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2 In its Motion, Mainstar admits it had relationships with some, but not all, ofthe named Plaintiffs.

Mainstar identified the Plaintiffs it had relationships with, and indicated it would be moving for

summary judgment ofthe remaining claims asserted by non-relationship Plaintiffs in the near future.

Plaintiffs did not challenge or discuss Mainstar’s contention that some ofthe Plaintiffs have never had a

relationship with Mainstar. Thus, the Court concludes Plaintiffs have conceded that not all Plaintiffs

have a viable claim against Mainstar. The remainder ofthe Order shall address the claims against

Mainstar by Plaintiffs who have or have had a relationship with Mainstar.

3 The Court has reviewed Docket Nos. 60-2 through 60-6 and finds each ofthe agreements includes an

arbitration clause that is identical, or nearly identical, to the arbitration clause in Docket No. 60-3.

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Case 3:15-cv-01632-BEN-NLS Document 75 Filed 11/29/16 PageID.<pageID> Page 3 of 8
9 U.S.C. § 2. Section 2 demonstrates ‘“a national policy favoring arbitration’ of claims

that parties contract to settle in that manner.” Preston v. Ferrer, 552 U.S. 346, 352-53

(2008) (citing Southland Corp. v. Keating, 465 U.S. 1, 10 (1984)).

Under Section 3 ofthe FAA, where an issue involved in a suit or proceeding is

referable to arbitration under an agreement in writing, the district court “shall on

application of one ofthe parties stay the trial ofthe action until such arbitration has been

had in accordance with the terms ofthe agreement....” 9 U.S.C. § 3. The language is

mandatory, and district courts are required to order arbitration on issues as to which an

arbitration agreement has been signed. Kilgore v. KeyBank, N.A., 718 F.3d 1052, 1058

(9th Cir. 2013) (citing Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985)).

The role ofthe district court is “limited to determining (1) whether a valid agreement to

arbitrate exists and, ifit does, (2) whether the agreement encompasses the dispute at

issue.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).

DISCUSSION

I. The Parties Must Arbitrate the Threshold Issue ofWhether the IRA

Agreements are Valid and Enforceable

Mainstar asserts Plaintiffs claims must be heard by an arbitrator, pursuant to the

arbitration clause ofthe IRA Agreements. (Mot. at pp. 3-6.) Plaintiffs contest the

validity ofthe IRA Agreements and argue that the arbitration clauses are not enforceable

because their consent to the IRA Agreements were obtained by fraud. (Opp’n at pp. 8-9.)

Arbitration is a matter of contract, and a party “cannot be required to submit to

arbitration any dispute which he has not agreed so to submit.” Tracer Research Corp. v.

Nat’l Envtl. Servs. Co., 42 F.3d 1292, 1294 (9th Cir. 1994). Courts must determine

whether there is an agreement to arbitrate before ordering arbitration. Wagner v. Stratton

Oakmont, Inc., 83 F.3d 1046, 1048 (9th Cir. 1996). However, where a party challenges

the validity of an entire agreement containing an arbitration clause as the grounds for

avoiding arbitration, the determination ofthe validity ofthat agreement must first be

decided by an arbitrator. See Preston, supra, 552 U.S. at 353-354 (citing Buckeye Check

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1 Cashing, Inc. v. Cardegna, 546 U.S. 440, 446-448 (2006); Prima Paint Corp. v. Flood &

Conklin Mfg. Co., 388 U.S. 395, 403-404 (1967)) (“attacks on the validity of an entire

contract, as distinct from attacks aimed at the arbitration clause, are within the arbitrator's

ken.”)

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In their Opposition, Plaintiffs do not dispute Mainstar’s contention that their

contracts with Mainstar/FTCO evidence transactions involving commerce. Plaintiffs

acknowledge that the IRA Agreements contained arbitration clauses, and do not

challenge Mainstar’s contention that said clauses included language stating that any

controversies “arising out of or relating to this Agreement or the breach thereof, or to the

IRA or any transaction authorized by you and/or your agent, shall be settled by

arbitration ... The Parties are waiving their right to seek remedies in court, including the

right to jury trial.” (Mot. at 3:13-19, Docket Nos. 60-2 10, 60-3 | 8.20.) Additionally,

Plaintiffs did not directly address Mainstar’s arguments that the arbitration clauses apply

to the claims alleged in their Complaint.

Rather than attack the validity ofthe arbitration clauses as separate and apart from

the IRA Agreements, Plaintiffs instead challenge the validity and enforceability ofthe

IRA Agreements in their entirety. (Opp’n at pp. 8-9.) Put another way, Plaintiffs argue

that the arbitration clauses are not enforceable because the IRA Agreements are not

valid4. {Id.) Thus, it appears to the Court that the IRA Agreements contain arbitration

clauses, which are “valid, irrevocable, and enforceable.” 9 U.S.C. § 2. Accordingly, the

Court is required to refer Plaintiffs’ challenges to the validity ofthe IRA Agreements

(and thus the arbitration clause itself) to arbitration pursuant to Sections 3 and 4 ofthe

FAA. See Preston, supra, 552 U.S. at 353-354 (citations omitted). Plaintiffs must

arbitrate the issue ofwhether the IRA Agreements are valid and enforceable.

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4 The Court concludes Plaintiffs concede that their claims would be covered by the scope ofthe

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II. Whether the Case Should Be Stayed or Dismissed 

Mainstar moves the Court to dismiss, rather than stay Plaintiffs' claims. However, 

ifthe Court declines to dismiss the claims, Mainstar moves the Court to stay the action 

pending arbitration. (Mot. at pp. 6-7.) 

Under Section 3 ofthe FAA, a federal court is required to stay the trial of an action 

"on application of one ofthe parties to stay the trial ofthe action until such arbitration 

has been had in accordance with the terms of this agreement." 9 U.S.C. § 3. The Ninth 

Circuit has affirmed summary judgment of claims that are barred by an arbitration clause. 

See Sparling v. Hoffman Canst. Co., 864 F.2d 635,638 (9th Cir. 1988) (citing Martin 

Marietta Aluminum, Inc. v. General Electric Co., 586 F.2d 143 (9th Cir.1978)). 

Additionally, the Ninth Circuit has stated that a trial court may act sua sponte "to note the 

inadequacy ofa complaint and dismiss it for failure to state a claim." Id., quoting Wong 

v. Bell, 642 F.2d 359, 361 (9th Cir. 1981) (citations omitted). The court must give notice 

of its intention to dismiss and give the plaintiff some opportunity to respond unless the 

"[p ]laintiffs cannot possibly win relief." Id., citing Wong, 642 F .2d at 362. 

In Sparling, the defendant moved for a stay pending arbitration of the plaintiffs' 

claims. Id. at 637. In their opposition to the defendant's motion, the plaintiffs argued 

that the arbitration clause did not apply because the plaintiffs were fraudulently induced 

to enter the contract. Id. at 638. The district court found the plaintiffs' claims were 

barred by the arbitration clause and dismissed the claims, even though the defendant had 

only requested a stay. Id. at 637-638. The plaintiffs appealed, arguing the district court's 

dismissal was improper because the defendant had only requested a stay, and because the 

court lacked discretion to dismiss their claims. Id. 

On appeal, the Ninth Circuit first found the district court was not limited to 

ordering a stay because it was authorized to act on its own initiative to dismiss a 

complaint for failure to state a claim of a plaintiff. Id. at 638 (citations omitted). The 

Ninth Circuit determined the district court correctly found that the plaintiffs' fraud claims 

must be submitted to arbitration unless the arbitration clause itself was fraudulently 

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induced. Id., citing Prima Paint, supra, 388 U.S. at 402-04. Since the plaintiffs did not

claim that the arbitration clause itselfwas fraudulently induced, the court concluded that

“the plaintiffs could not possibly win relief and the dismissal was appropriate even

though it was on the court's own motion.” Id. (citations omitted).

Second, the Ninth Circuit cited to its previous decision in Martin Marietta, supra,

586 F.2d 143, where it affirmed the district court’s grant ofsummary judgment because

the claims were barred by an arbitration clause. Id. The plaintiffin Martin Marietta had

argued that Section 3 required the defendant to apply for a stay pending arbitration. The

Martin Marietta court held that Section 3 gave a court authority to grant a stay pending

arbitration (upon application by one ofthe parties), but did not preclude summary

judgment “when all claims are barred by an arbitration clause.” Id. Relying on this

premise, the Sparling court found Section 3 also did not limit the court's authority to

grant a dismissal. Id.

Here, similar to the plaintiffs in Sparling, Plaintiffs do not claim the arbitration

clause itselfwas fraudulently induced, only that the entire IRA Agreements were

fraudulently induced and thus invalid and unenforceable. (Opp’n at pp. 8-9.) As the

Court noted above, Plaintiffs’ Opposition did not argue that the arbitration clause would

not apply to their claims ifthe IRA Agreements were valid and enforceable. Instead,

Plaintiffs argued that “enforcing waiver ofthe plaintiffs’ rights to a jury trial and the

protection oftheir right to an Article 3 judge would be unconscionable.” (Opp’n at 9:5-

7.) Regardless, the Court must make its own determination in order to conclude whether

a dismissal or stay is appropriate.

Plaintiffs’ do not deny that the arbitration clauses state: “Any controversy arising

out of or relating to this Agreement or the breach thereof, or to the IRA ... shall be

settled by arbitration ... according to the rules ofThe American Arbitration

Association.” (Docket Nos. 60-3 to 60-6.) The Court notes that the scope ofthe

arbitration clauses are broad, and extends to all controversies arising out of, or related to

the agreement, or the IRA. (Id.) According to Plaintiffs’ Complaint, their claims against

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Mainstar for: (1) suppression ofmaterial facts under Civil Code § 1710; (2) aiding and

abetting suppression ofmaterial fact; and (3) aiding and abetting breach offiduciary duty

stem from ofMainstar’s role in serving as a custodian for their IRA accounts. (Compl.

243-260.) Thus, it appears that Plaintiffs’ claims arise out of, or are related to the

agreement or their IRA accounts, and the Court concludes Plaintiffs’ claims are covered

by the arbitration clause.

As a result, the Court finds Plaintiffs have failed to state a claim upon which relief

may be granted. Plaintiffs’ claims against Mainstar are subject to arbitration, as set forth

in the IRA Agreements. Defendants’ Motion to Dismiss is therefore GRANTED.

CONCLUSION

For the reasons set forth above, the Court GRANTS Defendant Mainstar’s Motion

to Dismiss. The Motion to Stay Pending Arbitration is VACATED as moot. The claims

against Mainstar are DISMISSED.

IT IS SO ORDERED.

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16 DATED: ///M , 2016

flON/ROGj/R T. BENITEZ

United States District Judge 17

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