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Morningstar Holding Corporation, A Foreign v. G2

March 10, 2011


The opinion of the court was delivered by: Honorable B. Lynn Winmill Chief U. S. District Judge



The Court has before it a Motion to Dismiss and/or For Summary Judgment filed by Defendants G2, LLC and Henry George. (Dkt No. 19). The Court heard oral argument on February 22, 2011. After considering the arguments and briefing of counsel, the Court will (1) dismiss with prejudice the negligent misrepresentation claim in Count One of the Plaintiff's Amended Complaint, (2) dismiss without prejudice and with leave to amend, the remaining claims in Counts One, and all claims in Counts Two and Three, and (3) deny the balance of the motion.


In August 2003, Plaintiff Morningstar Holding Corporation invested $2,000,000 in a High Yield Investment Program (HYIP), which was later discovered to be a fraudulent criminal scheme. Morningstar claims that it lost all but $15,000 of the investment in the scheme.

During the pendency of a criminal action against the organizers of HYIP, Morningstar hired Defendant G2, LLC to investigate and recover the money Morningstar lost in the HYIP scheme. Defendants Henry George and Rich Douglas were the members of G2 with whom Morningstar's President, Harold McNee Jr., communicated and through which G2 conducted its activities. In addition, G2's registered agent in California is listed as Henry George. However, both George and Douglas's names are aliases. Henry George's true identity is George Goldsmith, and Rich Douglas's true identity is Rich Gurnett. However, to avoid confusion, the Court will refer to the individual defendants by their aliases, since it is by those names they are referred to in the Complaint.

Morningstar entered into an Asset Recovery Agreement with G2 on August 12, 2005, and on the same day, executed a Power of Attorney designating Defendants George and Douglas individually, and "G2, LLC corporately" as its "true and lawful" attorneys. Amend. Cmplt., ¶ 9; Affidavit of Henry George a/k/a George Goldsmith in Support of Motion to Dismiss and/or Motion For Summary Judgment (Dkt. 20) ("George Affid."), ¶ 13 & Exhs. 1 & 2. Neither George nor Douglas revealed that their names were aliases, and Morningstar did not discover this fact until after filing this lawsuit. Amend. Cmplt., ¶ 9.

George and Douglas allegedly made several representations and promises to Morningstar's President which Morningstar claims were intended to induce it to enter into the Asset Recovery Agreement. See Amend. Cmplt., ¶ ¶ 7-9, 15. Morningstar was introduced to Defendants because they had already been involved in the criminal investigation, and had been hired by other victims to assist recovering their losses.*fn1 Accordingly, Plaintiff alleges, Defendants represented that they were experienced international private investigators, aware of all of the facts of the HYIP scheme, and that as a result of the on-going criminal investigation, Morningstar would fully recover its initial investment, as well as "substantially more." Amend. Cmplt., ¶ 7. Defendants further represented "that they had been working on the case for a substantial time; that recovery of the money was imminent; and that there would be no need to retain lawyers or institute further legal proceedings." Id. Plaintiff claims that "these representations were false and were made intentionally or without any reasonable good faith basis in fact." Id.

Plaintiff further alleges that Defendants represented that Morningstar would not have to advance any funds for the investigation because other investors had already done so. Amend. Cmplt., ¶ 8. In turn, Morningstar would pay a higher commission (50%) of its recovery to G2 than the other investors (20%). Id.

Allegedly contrary to their representations about hiring legal counsel or instituting legal proceedings, Defendants "shopped the case" to several law firms and retained a Florida law firm to pursue bankruptcy and civil claims. Id. at ¶ 11. Plaintiff alleges that Defendants breached their retention agreement with the law firm, and that Plaintiff was then forced to separately retain the law firm and pay additional contingent fees on top of Defendants' commission of 50%. Id.

After the civil and bankruptcy cases were filed on May 8, 2006 and February 16, 2007 respectively (see Amend. Cmplt., ¶ 10), Defendants demanded that Morningstar advance certain expenses to allow the recovery to go forward. Id., ¶ 12. Plaintiff alleges this demand was in contravention of their promises and the terms of the Asset Recovery Agreement. Id. Morningstar did not advance any fees and attempted to renegotiate the agreement. Id. Defendants did not respond. Id. Morningstar consequently revoked the Asset Recovery Agreement on August 27, 2008, along with the Power of Attorney. Id.

Plaintiff alleges that Morningstar has received its portion of the settlement proceeds from the civil case, is expecting further recovery from the bankruptcy case, and is voluntarily holding 50% of the recovery funds in the event that Morningstar is found to owe any money to the Defendants. Id., ¶ 13. Morningstar has not disclosed the total amount it has or will receive in settlement on the grounds that bankruptcy court judge has ordered the terms of the settlement remain confidential presently.

Morningstar filed this action originally in state court on May 4, 2010, alleging claims for fraud, intentional and negligent misrepresentation (Count One), negligence (Count Two), breach of fiduciary duty (Count Three), recission (Count Four) and breach of contract (Count Five). Subsequently, Plaintiff discovered that both individual Defendants' names are aliases. Morningstar then filed an Amended Complaint on June 4, 2010, adding Defendants' use of aliases as additional bases for the fraud claims.*fn2

Defendants G2 and George removed this case to this Court on August 27, 2010, and move to dismiss all of Plaintiff's claims except for breach of contract,*fn3 and the claims against Defendant George personally.


1. Standard of Review for Rule 12(b)(6) Motions

Federal Rule of Civil Procedure 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief," in order to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 1964 (2007). While a complaint attacked by a Rule 12(b)(6) motion to dismiss "does not need detailed factual allegations," it must set forth "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. at 555. To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Id. at 570. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id. at 556. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. Id. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of 'entitlement to relief.' " Id. at 557.

In a more recent case, the Supreme Court identified two "working principles" that underlie Twombly. See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Id. "Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions." Id. at 1950. Second, only a complaint that states a plausible claim for relief survives a motion to dismiss. Id. "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.

Providing too much in the complaint may also be fatal to a plaintiff. Dismissal may be appropriate when the plaintiff has included sufficient allegations disclosing some absolute defense or bar to recovery. See Weisbuch v. County of L.A., 119 F.3d 778, 783, n. 1 (9th Cir. 1997) (stating that "[i]f the pleadings establish facts compelling a decision one way, that is as good as if depositions and other . . . evidence on summary judgment establishes the identical facts").

Even after Iqbal it appears that dismissal without leave to amend is improper unless it is beyond doubt that the complaint "could not be saved by any amendment." Harris v. Amgen, Inc., 573 F.3d 728, 737 (9th Cir. 2009)(issued 2 months after Iqbal).*fn4

The Ninth Circuit has held that "in dismissals for failure to state a claim, a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Cook, Perkiss and Liehe, Inc. v. Northern California Collection Service, Inc., 911 F.2d 242, 247 (9th Cir. 1990). The issue is not whether plaintiff will prevail but whether he "is entitled to offer evidence to support the claims." Diaz v. Int'l Longshore and Warehouse Union, Local 13, 474 F.3d 1202, 1205 (9th Cir. 2007)(citations omitted).

Under Rule 12(b)(6), the Court may consider matters that are subject to judicial notice. Mullis v. United States Bank, 828 F.2d 1385, 1388 (9th Cir. 1987). The Court may take judicial notice "of the records of state agencies and other undisputed matters of public record" without transforming the motions to dismiss into motions for summary judgment. Disabled Rights Action Comm. v. Las Vegas Events, Inc., 375 F.3d 861, 866 (9th Cir. 2004). The Court may also examine documents referred to in the complaint, although not attached thereto, without transforming the motion to dismiss into a motion for summary judgment. See Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005).

2. Count One: Fraud, Intentional Misrepresentation and Negligent Misrepresentation Claims Plaintiff alleges that Defendants ...

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