Source: http://wa.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20180403_0002245.WWA.htm/qx
Timestamp: 2019-04-23 04:19:30+00:00

Document:
FindACase | Kantor v. Bigtip, Inc.
BIGTIP, INC., et al., Defendants.
IT IS ORDERED that Defendants' Motion for Judgment on the Pleadings is PARTIALLY GRANTED and PARTIALLY DENIED.
IT IS FURTHER ORDERED that Defendants' WhoToo, Rowlen, and BigTip's Motion for Summary Judgment is DENIED.
This case is comprised of derivative and direct claims filed by a group of investors against the CEO/founder (Rowlen) of the company in which they invested (BigTip, Inc.), BigTip itself, the next company the CEO formed (WhoToo, Inc.), and the company which bought WhoToo (Demandbase, Inc.).
Motions practice has been vigorous and wide-ranging. This order concerns two motions: a motion for judgment on the pleadings brought by all Defendants and a motion for summary judgment filed by all Defendants except Demandbase (which filed its own summary judgment motion; see Order on Demandbase, Inc.'s Motion for Summary Judgment at Dkt. No. 220).
It is our intent that the investors in BigTip receive their investment interest back in cash upon closing, but these details are still to be worked out. While I remain optimistic, we will likely shut down the BigTip operations before the end of the year.
Standard of Review Motions for judgment on the pleadings are governed by FRCP 12(c); because 12(c) motions are “functionally identical” to Rule 12(b)(6) motions, the 12(b)(6) legal standard is applied. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 n.4 (9th Cir. 2011). A complaint may be dismissed under this standard if it fails to state a cognizable legal theory or does not allege facts sufficient to support a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988).
The Court will apply the pleading standard announced in Iqbal/Twombly: a plaintiff must allege “enough facts to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic. Corp. v.Twombly, 550 U.S. 544, 570 (2007). “Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 570 (citing 5 Wright & Miller, Federal Practice and Procedure § 1216, pp. 235-36 (3d ed. 2004). Adequately stating grounds for relief “requires more than labels and conclusion, and a formulaic recitation of the elements of a cause of action will not do.” Id. (citing Conley v. Gibson, 355 U.S. 41, 46-47 (1957)).
Plaintiffs attack the 12(c) motion as untimely, and the Court is sympathetic to their point. While standing to sue (which is what this 12(c) motion attacks) is an issue which can be raised at any time, even the language of FRCP 12(c) says a motion should be brought “[a]fter the pleadings are closed - but early enough not to delay trial.” Under most circumstances, an order granting such a motion would allow a plaintiff an opportunity to amend - with trial set for April 16, 2018, this matter is clearly past the point where amendment can be permitted without delaying trial. The Court is only dismissing claims pursuant to this 12(c) motion where amendment would be futile.
For purposes of the 12(c) motion, Defendants divide Plaintiffs' claims into two categories - derivative and fraud-based - and the Court will analyze the arguments using that dichotomy.
[s]tanding to bring a stockholder derivative claim requires a proprietary interest in the corporation whose right is asserted Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 735-36 (3d Cir. 1970), cert. denied, 401 U.S. 974 (1971). A creditor has no equitable standing to sue derivatively.
Haberman v. Wash. Pub. Power Supply Sys., 109 Wn.2d 107, 149 (1987).
Plaintiffs' SAC alleges that “Defendants stole, misappropriated, and converted BigTip's equipment, inventory and assets and gave them to WhoToo. WhoToo subsequently transferred all of its assets to Demandbase.” (SAC, ¶ 63.) The claim is founded on the existence of some proprietary interest in the assets of BigTip, a proprietary interest in the corporation for which this group of investors (whose notes were never converted into BigTip stock) has provided no legal justification, either from the terms of their investment agreements, state or federal statute, or case law.
The 12(c) motion will be GRANTED as to this claim; since Plaintiffs will never be able to allege a proprietary interest in the assets of the corporation, amendment would be futile and the dismissal will be with prejudice.
As a general rule, corporations and their officers owe no fiduciary duty to the corporation's creditors. Haberman, 109 Wn.2d at 109.
However, there is case law (cited by the judge who formerly presided over this case; see Kantor v. BigTip, 2016 WL 4193861, at *4) that corporate officers or directors own a fiduciary duty to creditors once the corporation becomes insolvent. “That duty, in essence, is to use the remaining corporate assets for the benefit of creditors.” Textron Fin. Corp. v. Underwood (In re Underwood), 2004 Bankr. LEXIS 1461, *12 (E.D. Wash. 2004)(citing In re Jacks, 266 B.R. 728, 738 (U.S. BAP, 9th Cir. 2001)). Rowlen admitted that he assigned himself several corporate assets at the point that BigTip was on the brink of insolvency as compensation for the fact that he had been working without pay for a period of time. (Mtn. at 10; Rowlen Decl. at ¶ 36; Dkt. No. 147-32 at 2.) If proven, this could be found to be a breach of his fiduciary duty to the creditors under Textron.
The Court acknowledges that this portion of the ruling creates somewhat of a jurisprudential bind. The SAC does not allege the transfer of BigTip's assets to Rowlen as part of the fiduciary breach claim. The evidence of Rowlen's receipt of the BigTip assets was developed during the discovery/deposition process. The legal impact of that transfer (in terms of the corporation's fiduciary duty to its creditors) was pointed out by U.S. District Judge Richard A. Jones in an earlier ruling, making these facts part of the court record.
This particular motion was filed very late and the trial date is rapidly approaching. However, the pretrial order - the document which will supersede the complaint - has not yet been signed; no further facts need be developed, therefore the cause of action can be re-stated in the pretrial order (when the pleadings are realigned with the record). The evidence regarding the transfer of assets to Rowlen at a time of insolvency is there (by Defendants' own admission), it supports a breach of fiduciary duty claim on behalf of the creditors and the Court will allow it to go forward on that basis.
The 12(c) motion is DENIED as to this claim.
Plaintiffs' allegations as to this cause of action fall into two categories. First, Plaintiffs allege that “Defendants… moved all or some of BigTip's source code and the platform that had been built for BigTip and transferring [sic] same to WhoToo without any authorization of the investors to the harm of the investors.” (SAC, ¶ 75.) This portion of their pleading suffers from the same defect as the cause of action for conversion; namely, no legal basis for a proprietary interest in the assets of BigTip.
While Plaintiffs had no proprietary interest in the assets of BigTip, they did have a contractual agreement with Rowlen and BigTip that the funds which they invested were to be used for the development, maintenance and improvement of the business in which they had agreed to invest; namely, BigTip. If, as they allege, those funds were utilized in part for the creation of a business in which they did not invest and from which they would see no return on their investment, Plaintiffs have stated a claim for unjust enrichment upon which relief may be granted. That claim for unjust enrichment extends to Rowlen, BigTip, and WhoToo,  and the 12(c) motion is DENIED to that extent.

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