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 him the option to convert principal and interest into company shares upon any sale and issuance of equity securities by Centripetal. Richards alleged that Centripetal issued 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 represented that no equity securities had been issued that would trigger his conversion option. Richards alleged that defendants falsely made this representation to induce him to sign the agreement.

The second amended complaint asserted twelve counts, including breach of contract, breach of fiduciary duty, constructive fraud, fraudulent concealment, negligent misrepresentation, intentional fraud, fraudulent inducement, violations of California Civil Code sections 1542 and 1668, unjust enrichment, and claims under California Corporations Code sections 25401 and 25403.

Personal Jurisdiction Over Paul Barkworth

Paul Barkworth separately moved to dismiss for lack of personal jurisdiction. Richards argued that specific jurisdiction existed because Barkworth had conducted business with Richards and other California-based investors, signed the notes, exchanged emails with Richards, and sent an early draft of the settlement agreement.

The court applied the fiduciary shield doctrine, which generally prevents a person from being subjected to personal jurisdiction based solely on acts taken in a corporate capacity. The court concluded that the complaint did not plausibly allege that Barkworth planned the alleged fraud or played a substantive role in the settlement negotiations beyond sending a draft agreement and one allegedly false communication. The court therefore granted Barkworth's motion to dismiss for lack of personal jurisdiction without leave to amend. The court did not reach the other requirements for personal jurisdiction.

Claims Challenging the Failure to State a Claim

The court declined to dismiss the breach-of-contract claim as untimely. Richards alleged that he discovered the alleged fraud and breach only after Centripetal disclosed the existence of millions of warrants and options in November 2020, followed by his detailed review of investor reports. The court held that whether Richards discovered the alleged breach earlier, or should have discovered it through reasonable diligence, was a factual question not suitable for resolution at this stage.

The court also declined to apply automatically the definition in California Corporations Code section 25017(e) to the notes' use of the phrase “sale and issuance.” The court found an apparent factual dispute about the parties' intended meaning of that phrase and did not rely on the statutory definition to dismiss the contract claim.

The court denied dismissal of the negligent misrepresentation, intentional fraud, and fraudulent inducement claims. It held that Richards adequately alleged that defendants misrepresented that no events had occurred that would trigger his conversion rights, both before and in the settlement agreement, and that his claims were not subject to dismissal at this stage based on the asserted limitations periods.

The court denied dismissal of the fraudulent concealment claim. It found that Richards adequately alleged a transactional relationship, that Centripetal's issuance of shares after the exercise of options triggered his rights, that defendants concealed this information intending to deny him the benefit of his investment, and that he was unaware of the alleged conduct and suffered damages.

The court dismissed the breach-of-fiduciary-duty claim. It held that Richards's alleged stock-dilution claim had to be brought derivatively, meaning on behalf of the company, and that the case was not a derivative action. The court also held that Richards's status as a convertible-note holder did not establish fiduciary duties owed to him.

The court dismissed the constructive-fraud claim because Richards alleged only an ordinary noteholder-and-issuer relationship and provided no authority showing that relationship was confidential. It dismissed the unjust-enrichment claim because Richards cited no authority establishing that the investment return he claimed defendants retained constituted a profit recoverable under unjust-enrichment principles.

The court dismissed the claims under California Civil Code sections 1542 and 1668. Richards conceded that he was not seeking damages for the section 1542 violation. The court held that the section 1668 claim was precluded because Virginia law governed the settlement agreement and, independently, that Richards had not alleged the concurrent or future fraud required for a section 1668 claim.

Richards did not contest dismissal of the claims under California Corporations Code sections 25401 and 25403, so the court dismissed those claims as well.

Disposition

The court granted in part and denied in part the defendants' motion to dismiss for failure to state a claim. The court dismissed Counts Two, Three, Eight, Nine, Ten, Eleven, and Twelve without leave to amend. The motion was otherwise denied, leaving the breach-of-contract, fraudulent-concealment, negligent-misrepresentation, intentional-fraud, and fraudulent-inducement claims in the case.

The court granted Barkworth's motion to dismiss for lack of personal jurisdiction without leave to amend and denied the defendants' motion to stay discovery. The order was signed by Judge Haywood S. Gilliam, Jr., and dated May 8, 2024.