Richards v. Centripetal Networks, Inc.

Background

Albert Richards purchased two identical convertible promissory notes from Centripetal Networks, Inc., for $250,000 each. The notes gave Richards the option to convert principal and interest into company shares upon a sale and issuance of equity securities. Richards alleged that Centripetal issued different equity securities from 2016 through 2019 without giving him the notice required by the notes.

In October 2019, Centripetal paid the balance on the notes, and Richards gave up his conversion rights in a settlement agreement. The agreement stated that no equity securities had been issued that would trigger his conversion option. It also stated that issuing common options or warrants would not constitute the specified financing round or trigger conversion rights.

Richards alleged that the defendants falsely represented that no triggering equity securities had been issued and thereby fraudulently induced him to sign the settlement agreement. His First Amended Complaint asserted 13 counts, including contract, fraud, misrepresentation, fiduciary-duty, unjust-enrichment, negligence, and California securities-law claims. Centripetal Networks, Inc., Steven Rogers, and Jonathan Rogers moved to dismiss under Rule 12(b)(6), which allows dismissal for failure to state a legally sufficient claim. Richards opposed the motion.

Analysis

Breach of contract. The court held that the settlement agreement barred contract claims concerning the issuance of common options and warrants because its specific language controlled over more general language preserving other rights. But the court found the agreement’s treatment of shares issued after the exercise of options susceptible to multiple reasonable interpretations. Richards adequately alleged that Centripetal issued shares after holders exercised options and that those issuances triggered rights under the notes. The motion was therefore denied as to Count One.

Fraud-related claims. The court found that Richards plausibly alleged fraudulent inducement based on an alleged misrepresentation that no triggering event had occurred, where the alleged event was the issuance of shares after options were exercised. At the pleading stage, the defendants’ argument that investor reports showed Richards knew about those issuances did not establish that the claim failed as a matter of law. The court also concluded that Richards’s allegations satisfied the standard for fraud and the lower standard for negligent misrepresentation. The motion was denied as to Counts Six, Seven, and Eight.

Claims dismissed with leave to amend. The court dismissed Count Two, breach of the implied covenant of good faith and fair dealing, because the allegations duplicated the breach-of-contract claim. It dismissed Counts Three, Four, and Five—breach of fiduciary duty, constructive fraud, and concealment—because Richards alleged only a lender-borrower relationship and no special circumstances creating a fiduciary duty. It dismissed Count Nine under California Code section 1668 because the settlement concerned past conduct and did not release liability for fraudulent inducement of the settlement itself. It dismissed Count Ten, unjust enrichment, because Richards did not allege that the defendants retained a benefit at his expense; the notes’ balance had been repaid. It dismissed Count Thirteen, negligence, as duplicative of the negligent-misrepresentation claim.

Claims under California Corporations Code sections 25401 and 25403. Neither side made specific arguments about Counts Eleven and Twelve. The court therefore denied the motion as to those claims.

Disposition

Judge Haywood S. Gilliam, Jr. granted the motion to dismiss in part insofar as the court dismissed Counts Two, Three, Four, Five, Nine, Ten, and Thirteen with leave to amend. The court otherwise denied the motion. Richards was ordered to file a Second Amended Complaint by January 23, 2024. The opinion also set a case-management conference for February 6, 2024.