Fitzgerald v. GEM Funding, LLC

Background

Michael Scott Fitzgerald operates California Scuba Center, LLC. According to the First Amended Complaint, Fitzgerald entered into 13 merchant cash advance agreements with nine financing companies between January 2020 and September 2021. The agreements provided plaintiffs with $311,126 upfront in exchange for the purchase of $548,244 in future receivables. Fitzgerald alleged that the agreements were actually short-term loans with illegal interest rates and that defendants used deceptive and fraudulent conduct to induce the transactions.

Fitzgerald sued on behalf of himself and California Scuba, asserting civil claims under the Racketeer Influenced and Corrupt Organizations Act, fraud, usury, negligence per se based on California Financial Code section 22001, California’s unfair-competition law, and unjust enrichment. He sought restitution, an injunction, and a declaration concerning the agreements. Defendants separately moved to dismiss under rules addressing subject-matter jurisdiction, personal jurisdiction, service of process, and failure to state a claim.

Representation of California Scuba

The defendants argued that California Scuba could not represent itself because Fitzgerald is not a lawyer. The court agreed that the district’s local rules require a company to appear through a member of the court’s bar. Because Fitzgerald was representing both himself and California Scuba without a lawyer, the court granted California Scuba’s request for 60 days to retain counsel and stayed the case during that period.

Service on West Coast

West Coast argued that plaintiffs had not properly served it. The court concluded that plaintiffs had not followed federal or California service requirements because they served the California Secretary of State without first obtaining the required court order after attempting service on West Coast’s authorized agent. Because the court found a reasonable prospect that plaintiffs could properly serve West Coast, it granted West Coast’s motion, quashed service, and gave plaintiffs one more opportunity to serve it.

Plaintiffs were required to provide proof of service on West Coast within 60 days of the order or show good cause why West Coast should not be dismissed. The order states that failure to comply on time would result in dismissal of the unserved defendant.

Personal jurisdiction over Stern and Fundry

Yitzhak Stern and Fundry, LLC, also known as Blue Whale Funding, challenged the court’s personal jurisdiction. The court found that Stern and Fundry lacked the continuous and systematic contacts with California needed for general personal jurisdiction. It also found that plaintiffs had not specifically alleged facts showing that Stern or Fundry purposefully conducted activities in California or that the claims arose from California-related activities.

The court therefore granted Stern and Fundry’s motion to dismiss for lack of personal jurisdiction, with leave to amend. The court also granted plaintiffs’ request for judicial notice of a Federal Trade Commission complaint and related court order, but considered those documents only as evidence of information publicly available at the time and found them insufficient to establish California contacts.

Subject-matter jurisdiction over Fitzgerald’s claims

The court ruled that Fitzgerald’s alleged injury from the performance guarantees was not ripe. A claim is not ripe when it depends on future events that may never occur. Fitzgerald alleged that the guarantees made him personally liable for California Scuba’s obligations, but he did not allege that defendants had enforced them. The court concluded that defendants might never enforce the guarantees.

The court also ruled that Fitzgerald lacked standing to bring claims based on harm to California Scuba. Standing is the requirement that a plaintiff show a concrete injury to a legally protected interest that is fairly traceable to the defendant and likely to be remedied by a favorable decision. Fitzgerald signed the agreements for California Scuba and personally guaranteed payment, but he was not himself a party to the agreements. The court found that the alleged harm reflected harm to the company rather than a separate, direct injury to Fitzgerald.

The court rejected Fitzgerald’s arguments that defendants’ alleged misrepresentations personally injured him and that he used $10,000 of his own money to support the company. It found that the alleged misrepresentation injury was attributable to California Scuba and that the personal-finance allegation was raised for the first time in opposition and did not establish an injury independent of the company’s harm. The court therefore granted defendants’ motions to dismiss for lack of subject-matter jurisdiction as to Fitzgerald and dismissed Fitzgerald’s claims with leave to amend.

What the court did not decide

Because the threshold issues were dispositive of the motions, the court did not decide whether the claims were plausibly pleaded, whether the agreements violated California usury law, whether defendants committed fraud, or whether the agreements’ forum-selection and choice-of-law provisions were enforceable.

Disposition

The order states that defendants’ motions to dismiss were granted in part and denied in part. California Scuba received 60 days to retain counsel, and the case was stayed during that period. Service on West Coast was quashed, with one additional opportunity to serve it within 60 days. Stern and Fundry’s personal-jurisdiction motion was granted with leave to amend. Defendants’ subject-matter-jurisdiction motions concerning Fitzgerald were granted, and Fitzgerald’s claims were dismissed with leave to amend. Plaintiffs could file an amended complaint within 90 days, by December 27, 2022, but could not add new claims or parties without court permission or the parties’ agreement.