Order granting motion to dismiss (FAC) — Byrnes v. Fountainhead

Record facts

U.S. District Court, Central District of California · No. 2:20-cv-04149-DDP-RAO · Doc. 35 · 2021-08-06 · Docket on CourtListener

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O
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
ELIZABETH M. BYRNES, INC.,
Plaintiff,
v.
FOUNTAINHEAD COMMERCIAL
CAPITAL, LLC,
Defendants.
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Case No. CV 20-04149 DDP (RAOx)
ORDER GRANTING DEFENDANT’S MOTION
TO DISMISS
[Dkt. 23]
Presently before the court is Defendant Fountainhead
Commercial Capital, LLC (“Fountainhead”)’s Motion to Dismiss
Plaintiff’s First Amended Complaint.  Having considered the
submissions of the parties and heard oral argument, the court
grants the motion and adopts the following Order. 
I.
Background
Beginning in March 2020, public health measures necessitated
by the outbreak of the coronavirus pandemic had “devastating”
effects on small businesses.  First Amended Complaint (“FAC”) ¶ 12. 
In California alone, over 2.4 million people lost their jobs in
March and April.1  In response, the federal government enacted the
1 See “California unemployment rate rose to 5.3 percent in
(continued...)
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Coronavirus Aid, Relief, And Economic Security (“CARES”) Act,
Pub.L. 116–136, H.R. 748.  FAC ¶ 13.  The CARES Act, among other
things, established the Paycheck Protection Program (“PPP”), a $349
billion loan program through which small businesses could obtain
forgivable loans backed by the Small Business Administration, but
administered by private lenders.  FAC ¶ 14.
On March 27, the day the CARES Act was signed into law,
Fountainhead advertised that it would “soon be tackling the loan
inquiries lined up in our queue, providing business owners with
capital they need within days.”  FAC ¶ 17.  The next day, Plaintiff
submitted a PPP loan application to Fountainhead for a loan of less
than $25,000.  FAC ¶ 28.  Fountainhead responded with an e-mail
stating that Plaintiff was “in the queue,” and that “[h]elp is on
the way,” and asking her to gather certain documentation.  Id.  The
next day, Fountainhead told Plaintiff to expect “an invitation to a
secure portal for document upload within the next 48 business
hours.”  Id.  Plaintiff did not receive any such invitation.  Id.
Fountainhead continued to promote PPP loans, encouraging
applications and stating that it “hope[d] to make these loans
within days.”  FAC ¶ 20.  Fountainhead executives made statements
touting its advantage over other, bank-based lenders, such as
Fountainhead’s ability to approve loans “within a few hours.”  FAC
¶ 19.  Fountainhead further represented that it “require[d] no[]
prior relationship, no special (money-making) criteria, and [was]
1(...continued)
March,”
https://www.edd.ca.gov/newsroom/unemployment-april-2020.htm;
“California unemployment rate rose to record 15.5 percent in
April,” https://www.edd.ca.gov/Newsroom/unemployment-may-2020.htm.
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processing first come, first serve . . . no prioritization.”  FAC ¶
24.       
On April 9, approximately two weeks after submitting her
application and being instructed to gather her documentation,
Plaintiff followed up with Fountainhead to confirm the status of
her loan.  FAC ¶ 28.  Fountainhead confirmed that her loan was in
the queue and again indicated that Plaintiff would receive access
to a document upload portal within 24 to 48 hours.  Id.  Plaintiff
did not receive an e-mail providing any such access.  Id.  Instead,
on April 13, Fountainhead sent an e-mail stating, “We ask for your
patience with us . . . as we process your requests as quickly and
responsibly as we can. Should you feel the need to remove yourself
from our loan queue and join another lender’s list, kindly let us
know . . . so we may continue to prioritize our list.”  FAC ¶ 29. 
On the basis of these representations, Plaintiff gathered the
requested documents, waited for the opportunity to upload them,
refrained from submitting a loan application to other lenders, and
made other related decisions regarding her small business.  FAC ¶
30.  Plaintiff never, however, received PPP funding from
Fountainhead.  FAC ¶ 3.  
Plaintiff alleges, on behalf of a putative class of California
businesses that applied for PPP loans, that Fountainhead’s
representations to California businesses were false and misleading. 
FAC ¶ 17.  Plaintiff alleges, for example, that Fountainhead was
not even licensed to engage in lending activities in California
until April 21 and had not secured any funding prior to that time,
and therefore could not possibly have extended loans “within days.” 
FAC ¶¶ 17, 26.  Plaintiff also alleges that, contrary to its
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representations, Fountainhead did prioritize favored customers and
higher-value loans that would yield higher fees to Fountainhead
than would relatively small loans, such as that sought by
Plaintiff.  FAC ¶ 32.  Plaintiff’s FAC alleges state law claims for
fraudulent concealment, unfair business practices, and false
advertising.  Fountainhead now moves to dismiss all claims.  
II.
Legal Standard
A complaint will survive a motion to dismiss when it
“contain[s] sufficient factual matter, accepted as true, to state a
claim to relief that is plausible on its face.”  Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009)(quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)). When considering a Rule 12(b)(6) motion, a
court must “accept as true all allegations of material fact and
must construe those facts in the light most favorable to the
plaintiff.”  Resnick v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000). 
Although a complaint need not include “detailed factual
allegations,” it must offer “more than an unadorned,
the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at
678.  Conclusory allegations or allegations that are no more than a
statement of a legal conclusion “are not entitled to the assumption
of truth.” Id. at 679. In other words, a pleading that merely
offers “labels and conclusions,” a “formulaic recitation of the
elements,” or “naked assertions” will not be sufficient to state a
claim upon which relief can be granted. Id. at 678 (citations and
internal quotation marks omitted).
“When there are well-pleaded factual allegations, a court
should assume their veracity and then determine whether they
plausibly give rise to an entitlement of relief.” Iqbal, 556 U.S.
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at 679.  Plaintiffs must allege “plausible grounds to infer” that
their claims rise “above the speculative level.” Twombly, 550 U.S.
at 555-56.  “Determining whether a complaint states a plausible
claim for relief” is “a context-specific task that requires the
reviewing court to draw on its judicial experience and common
sense.” Iqbal, 556 U.S. at 679.
III. Discussion
A.
Fraudulent concealment
“The elements of fraudulent concealment are: (1) the defendant
concealed or suppressed a material fact; (2) the defendant was
under a duty to disclose the fact to the plaintiff; (3) the
defendant intentionally concealed or suppressed the fact with the
intent to defraud the plaintiff; (4) the plaintiff was unaware of
the fact and would not have acted as he did if he had known of the
concealed or suppressed fact; and (5) as a result of the
concealment or suppression of the fact, the plaintiff sustained
damage.”  Burch v. CertainTeed Corp., 34 Cal. App. 5th 341, 348
(2019).  Fountainhead contends that Plaintiff’s fraudulent
concealment claim fails because Fountainhead had no duty to
disclose any of the allegedly concealed facts, including
Fountainhead’s lack of licensing and capital and its loan
prioritization procedures.2  (Reply at 10.)  
2 Although “duty is not an element of fraud in the traditional
sense,” the FAC alleges only fraudulent concealment, not an
affirmative misrepresentation.  Cicone v. URS Corp., 183 Cal. App.
3d 194, 202 (1986); see also Immobiliare, LLC v. Westcor Land Title
Ins. Co., 424 F. Supp. 3d 882, 889–90 (E.D. Cal. 2019)(“While a
claim for fraudulent concealment requires a duty to disclose, a
claim for affirmative misrepresentation does not.”).  
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A duty to disclose may arise in four circumstances: “(1) when
the defendant is in a fiduciary relationship with the plaintiff;
(2) when the defendant had exclusive knowledge of material facts
not known to the plaintiff; (3) when the defendant actively
conceals a material fact from the plaintiff; and (4) when the
defendant makes partial representations but also suppresses some
material facts.”  Los Angeles Mem’l Coliseum Com. v. Insomniac,
Inc., 233 Cal. App. 4th 803, 831 (2015).  Plaintiff contends that
the latter three of these circumstances are applicable here. 
(Opposition at 13.)  All three, however, “presuppose the existence
of some other relationship between the plaintiff and defendant in
which a duty to disclose can arise.”  Burch, 34 Cal.App.5th at 349.
“This relationship has been described as a ‘transaction,’ such as
that between seller and buyer, employer and prospective employee,
doctor and patient, or parties entering into any kind of
contractual arrangement.”  Id. at 349-50; see also LiMandri v.
Judkins, 52 Cal. App. 4th 326, 337 (1997) (“[W]here material facts
are known to one party and not to the other, failure to disclose
them is not actionable fraud unless there is some relationship
between the parties . . . .  As a matter of common sense, such a
relationship can only come into being as a result of some sort of
transaction between the parties.”) (internal quotation marks and
citations omitted).  Although “a duty to speak may arise when
necessary to clarify misleading half-truths,” “[w]here . . . a
sufficient relationship or transaction does not exist, no duty to
disclose arises even when the defendant speaks.”  Boeken v. Philip
Morris, Inc., 127 Cal. App. 4th 1640, 1659 (2005) (internal
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quotation marks and citation omitted); Bigler-Engler v. Breg, Inc.,
7 Cal. App. 5th 276, 312 (2017).
Here, Plaintiff has not alleged the existence of any kind of
transactional or other relationship between herself and Defendant. 
Defendant did not, therefore, owe Plaintiff any duty of disclosure,
and her fraudulent concealment claim must fail.3   
B.
Remaining Claims
Plaintiff’s Second and Third Causes of action allege claims
under California’s Unfair Competition Law (“UCL”), Cal. Bus. &
Prof. Code § 17200 et seq., and False Advertising Law (“FAL”), Cal.
Bus. & Prof. Code § 17500 et seq., respectively. Claims under both
the UCL and FAL are equitable in nature. Nationwide Biweekly
Admin., Inc. v. Superior Court of Alameda Cty., 9 Cal. 5th 279,
326, 462 P.3d 461, 488 (2020); see also Munning v. Gap, Inc., 238
F. Supp. 3d 1195, 1203 (N.D. Cal. 2017). Fountainhead contends
that, under the Ninth Circuit’s recent decision in Sonner v.
Premier Nutrition Corp., 971 F.3d 834, 837 (9th Cir. 2020),
Plaintiff cannot bring these equitable claims because she has not
alleged that she lacks an adequate remedy at law.
In Sonner, the plaintiff brought a damages claim at law as
well as equitable claims for restitution. The plaintiff dropped
her damages claim, however, in an attempt to have all claims tried
before the court rather than a jury. Sonner, 971 F.3d at 838. The
3 Because Plaintiff does not allege the existence of a
borrower-lender relationship with Defendant, the court does not
address the question whether or when a “mere lender of money” might
owe a borrower a duty to disclose for purposes of fraudulent
concealment.  See Welte v. Wells Fargo Bank Nat’l Ass’n, 189 F.
Supp. 3d 965, 973 (C.D. Cal. 2016) (quoting Nymark v. Heart Fed.
Sav. & Loan Ass’n, 231 Cal.App.3d 1089, 1096 (1991)).
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district court then dismissed the equitable claims under
California’s inadequate-remedy-at-law doctrine. Id. On appeal,
the Ninth Circuit affirmed on an alternative ground, holding that,
regardless of state law, a federal court sitting in diversity is
bound by traditional federal equitable principles. Id. at 842,
845. The court further held that among those principles,
consistent with California’s inadequate-remedy-at-law doctrine, is
the requirement that a plaintiff establish that she lacks an
adequate remedy at law before pursuing equitable restitution. Id.
at 844.
In cases such as this one, where Plaintiff makes no such
allegation, district courts appear to have uniformly dismissed
equitable claims under Sonner. See, e.g., In re MacBook Keyboard
Litig., No. 5:18-CV-02813-EJD, 2020 WL 6047253, at *3 (N.D. Cal.
Oct. 13, 2020) (collecting cases); see also Teresa Adams v. Cole
Haan, LLC, No. SACV-20-913-JVS, 2020 WL 5648605, at *2 (C.D. Cal.
Sept. 3, 2020) (“The clear rule in Sonner that plaintiffs must
plead the inadequacy of legal remedies before requesting equitable
relief [] applies.”). Accordingly, Plaintiff’s second and third
causes of action are dismissed, with leave to amend.
IV. Conclusion
For the reasons stated above, Fountainhead’s Motion to Dismiss
is GRANTED. All three claims are DISMISSED, with leave to amend.
Any amended complaint shall be filed within fourteen days of the
date of this Order.
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IT IS SO ORDERED.
Dated:
DEAN D. PREGERSON
United States District Judge
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8-6-2021
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