Daniel V. Tierney 2011 Trust LLC v. Sun Hung Kai Strategic Capital Limited

Background

The plaintiffs alleged that they agreed to sell Sun Hung Kai Strategic Capital Limited shares of Series E preferred stock in Social Finance, Inc. under a Stock Transfer Agreement. The agreement provided for the sale of 101,640 shares for approximately $1.6 million. The parties later agreed to put the transaction on hold, and Sun Hung Kai subsequently told the plaintiffs that it wanted to cancel the agreement. The plaintiffs agreed, and the agreement was voided.

According to the amended complaint, however, the stock certificates had already been canceled and reissued in Sun Hung Kai’s name. The plaintiffs alleged that Sun Hung Kai did not immediately tell them about the transfer, pay for the shares, or return them. The plaintiffs learned of the transfer nearly four years later, after Social Finance announced a process for converting physical certificates into book-entry shares. Sun Hung Kai eventually returned the converted shares, but the plaintiffs alleged that the shares had lost more than 40 percent of their value by then.

The amended complaint asserted four claims: conversion, receipt of stolen property, fraud, and negligent misrepresentation. The motion at issue challenged only the fraud and negligent-misrepresentation claims under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim.

Fraud claim

The plaintiffs alleged fraud based on statements about the status and cancellation of the Stock Transfer Agreement, Sun Hung Kai’s submission of an ownership affidavit to Social Finance, statements that Social Finance was responsible for the transfer, and Sun Hung Kai’s alleged promise to return the shares. They also alleged fraudulent concealment based on Sun Hung Kai’s failure to disclose that it possessed the shares.

The court applied Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity, including facts showing how, when, where, to whom, and by what means the alleged fraudulent statements were made. Applying California law, the court explained that fraud requires a misrepresentation or concealment, knowledge that it was false, an intent to induce reliance, justifiable reliance, and resulting damage.

The court found the allegations insufficient for each theory. It held that the allegation that Sun Hung Kai described the agreement as “on hold” did not identify facts showing the statement was false. The allegation that Sun Hung Kai falsely said it wanted to cancel the agreement did not adequately plead Sun Hung Kai’s knowledge or intent at the time of cancellation. The court declined to infer those facts merely from Sun Hung Kai’s possession of the shares.

The court also held that the affidavit submitted to Social Finance was not an actionable misrepresentation to the plaintiffs because it was made to a third party. The allegations that Sun Hung Kai said Social Finance was responsible for the transfer and would return the shares were also too conclusory to satisfy the heightened pleading standard.

As to fraudulent nondisclosure, the court held that the plaintiffs had not adequately pleaded why they could not reasonably have discovered the transfer, particularly because the agreement stated that the transfer and sale would occur when the agreement was executed. The court also found that the alleged active concealment consisted only of nondisclosure, rather than affirmative acts of concealment. Finally, the alleged partial representations about canceling the agreement were unsupported by specific facts showing what information had been suppressed or how the statements were misleading. The court therefore granted the motion to dismiss the fraud claim.

Negligent-misrepresentation claim

The plaintiffs based their negligent-misrepresentation claim on two alleged statements: that Sun Hung Kai wanted to cancel its agreement to purchase the shares, and that Sun Hung Kai represented to Social Finance that it owned the shares. The court stated that negligent misrepresentation requires a false statement about a past or existing material fact, made without reasonable grounds for believing it true, with an intent to induce reliance, reasonable and justified reliance, and resulting damage.

The court rejected the first theory because, for the reasons stated in its fraud analysis, the plaintiffs had not adequately alleged facts showing that Sun Hung Kai’s statement about canceling the agreement was actionable. It rejected the second theory because the statement was made to Social Finance rather than to the plaintiffs, and the plaintiffs had not explained why that statement could support their negligent-misrepresentation claim. The court therefore granted the motion to dismiss that claim as well.

Disposition

Judge Yvonne Gonzalez Rogers granted the defendant’s motion to dismiss the fraud and negligent-misrepresentation claims without further leave to amend. The court ordered the defendant to answer the first and second claims—conversion and receipt of stolen property—within 14 days. The order terminated Docket Number 42. The court also noted that, if discovery revealed facts supporting the dismissed claims, the federal rules provided procedures for seeking leave to amend, but the order itself granted no further leave to amend.