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Financial Institution Products Corp. v. Los Global Systems LLC

United States District Court, D. Arizona

August 24, 2016

Financial Institution Products Corp., et al., Plaintiffs,
LOS Global Systems, LLC, et al., Defendants.




         At docket 23, defendants LOS Global Systems, LLC, John Bulavinetz Michael (“J. Michael”), and Deborah Bulavinetz Michael (“D. Michael”) (collectively, “Defendants”) move pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6) for an order dismissing the plaintiffs' first amended complaint. Plaintiffs Financial Institution Products Corporation (“FIPCO”) and American Bank Systems Incorporated (“ABS”) (collectively, “Plaintiffs”) respond at docket 28. Defendants reply at docket 30. Oral argument was requested, but would not assist the court.


         According to the First Amended Complaint, J. Michael owns LOS Global, a company that owns a loan operating system (“LOS”) known as “LOS Plus Solutions Software” (“the Software”). The Software allows financial institutions to “create loan and deposit transaction documents for loan and deposit customers.”

         FIPCO and ABS went into business with LOS Global in 2011 under the name “eGlobal, llc” (“eGlobal”). FIPCO and ABS paid LOS Global “in excess of $75, 000” to acquire their membership interests in eGlobal. eGlobal's operating agreement (“Operating Agreement”) states that LOS Global would convey the Software in its entirety to eGlobal, and eGlobal's principal purpose is to develop, maintain, and market the Software to financial institutions and other users.

         The Software cannot be used for its intended purpose without loan and deposit forms. eGlobal does not own its own proprietary forms, but FIPCO and ABS do. FIPCO and ABS entered into separate license agreements (“License Agreements”) with eGlobal that grant FIPCO and ABS licenses to integrate the Software with each company's respective proprietary forms (“Integrated Software”) and then sublicense the Integrated Software to financial institutions. Although the License Agreements provide that eGlobal must give FIPCO and ABS a copy of the Software's source code, LOS Global has refused to share the source code with eGlobal, ABS, or FIPCO.

         Plaintiffs sued LOS Global in January 2016, claiming, among other things, that LOS Gloabal is liable for conversion, bad faith, and intentional interference with contract. Plaintiffs' original complaint also seeks a declaratory judgment and injunction requiring LOS Global to provide them with the source code (collectively, “the source code claims”). The First Amended Complaint adds J. Michael and D. Michael as defendants and adds new claims for fraudulent inducement and negligent misrepresentation (“the misrepresentation claims”), as well as an alternative source code claim: unjust enrichment.

         Plaintiffs' new misrepresentation claims allege that J. Michael was not who he said he was during the transactions described above. Although his legal name at the time was “John Michael Bulavinetz, ” he identified himself as “John Michael.”[1] Plaintiffs contend that if they had known J. Michael's legal name they would have discovered that they were dealing with someone who had been sued by the State of Arizona for fraud and misappropriation, had filed for bankruptcy, and had been referenced in an Arizona banking examination. As a result, Plaintiffs allege that they would not have entered into a business relationship with LOS Global or J. Michael.


         A. Rule 12(b)(1)

         Under Federal Rule of Civil Procedure 12(b)(1), a party may seek dismissal of an action for lack of subject matter jurisdiction. In order to survive a defendant's motion to dismiss, the plaintiff has the burden of proving jurisdiction.[2]

         There are two types of Rule 12(b)(1) jurisdictional attacks: facial and factual.[3] “In a facial attack, the challenger asserts that the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction. By contrast, in a factual attack, the challenger disputes the truth of the allegations that, by themselves, would otherwise invoke federal jurisdiction.”[4]

         Where the defendant brings a facial attack, the court assumes the factual allegations in the plaintiff's complaint are true and draws all reasonable inferences in the plaintiff's favor.[5] The court does not accept the truth of legal conclusions cast in the form of factual allegations, however.[6]

         Where the defendant brings a factual attack, “the district court may review evidence beyond the complaint without converting the motion to dismiss into a motion for summary judgment.”[7] “It also need not presume the truthfulness of the plaintiffs' allegations.”[8] “Once the moving party has converted the motion to dismiss into a factual motion by presenting affidavits or other evidence properly brought before the court, the party opposing the motion must furnish affidavits or other evidence necessary to satisfy its burden of establishing subject matter jurisdiction.”[9]

         B. Rule 12(b)(6)

         Rule 12(b)(6) tests the legal sufficiency of a plaintiff's claims. In reviewing such a motion, “[a]ll allegations of material fact in the complaint are taken as true and construed in the light most favorable to the nonmoving party.”[10] To be assumed true, the allegations “may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively.”[11] Dismissal for failure to state a claim can be based on either “the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.”[12] “Conclusory allegations of law . . . are insufficient to defeat a motion to dismiss.”[13]

         To avoid dismissal, a plaintiff must plead facts sufficient to “‘state a claim to relief that is plausible on its face.'”[14] “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.”[15] “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.”[16] “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.'”[17] “In sum, for a complaint to survive a motion to dismiss, the non-conclusory ‘factual content, ' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.”[18]

         Ordinarily, if “matters out side the pleadings are presented to and not excluded by the court, ” a Rule 12(b)(6) motion “must be treated as one for summary judgment under Rule 56, ” and the parties “must be given a reasonable opportunity to present all the material that is pertinent to the motion.”[19] There are two exceptions to this rule, however. “First, a court may consider material which is properly submitted as part of the complaint on a motion to dismiss without converting the motion to dismiss into a motion for summary judgment.”[20] Second, “a court may take judicial notice of ‘matters of public record.'”[21]


         A. The Amount in Controversy

         The First Amended Complaint alleges that this court has jurisdiction under 28 U.S.C. § 1332(a)(1) because the parties are of diverse citizenship and the amount in controversy exceeds $75, 000.[22] Defendants bring a factual jurisdictional attack to this claim under Rule 12(b)(1); they dispute the truth of the Plaintiffs' allegation that they have suffered any damages, let alone $75, 000 worth.

         Defendants' first attack is directed at Plaintiffs' source code claims.[23] According to Defendants, Plaintiffs are successfully selling sublicenses of the Software to their customers, and they cannot show that not having the source code has harmed or will harm them in any way. Plaintiffs respond by submitting the declarations of FIPCO's President, Pamela Kelly (“Kelly”), and ABS's Chief Executive Officer, James Bruce (“Bruce”). Because the court concludes that Plaintiffs have met their burden of proof, there is no need to consider Defendants' other attacks.

         A plaintiff ordinarily satisfies her burden of establishing the amount in controversy simply by requesting sufficient damages in her complaint.[24] In such cases, the court will accept the plaintiff's good faith allegation that she is seeking more than the statutory minimum, unless it appears to a “legal certainty” that she cannot.[25] But where the defendant challenges the amount in controversy pled in the complaint, the plaintiff must submit competent proof that justifies her allegations.[26] Competent proof can come in the form of facts alleged in the complaint with sufficient particularity, or it can come in the form of affidavits that demonstrate that it is possible for the plaintiff to recover more than the jurisdictional minimum.[27]

         Defendants ignore the legal certainty test and the cases cited by Plaintiffs that apply that test. Instead, Defendants assert that plaintiffs bear the burden of proving the amount in controversy by a preponderance of the evidence. The flaw with this argument is that it references the standard that applies in removal jurisdiction cases, [28]not original jurisdiction cases like the one before the court.[29] Where a defendant is invoking removal jurisdiction under 28 U.S.C. § 1441, courts conduct “a more thorough inquiry into the facts underpinning jurisdiction than the legal certainty test permits”-namely, the defendant must establish the jurisdictional minimum by a preponderance of the evidence.[30] But, where the plaintiff is invoking the court's original jurisdiction under § 1332(a), the legal certainty test applies, not the “more searching inquiry” that applies in removal cases.[31]

         Applying the legal certainty test to the case at hand, the court finds that it is not certain that Plaintiffs will recover less than the jurisdictional minimum. Kelly states in her declaration that without the source code “FIPCO has incurred substantial additional costs associated with unnecessary staff time to address maintenance, support and development issues for our clients.”[32] She asserts that her employees have spent 4, 897 hours addressing these unspecified issues, at a cost of about $127, 000 dollars to the company.[33] For his part, Bruce states that without the source code ABS is “unable to ensure performance of its duties with regard to the software to its customers, including maintaining and securing the software, and providing software updates for law and regulation changes.”[34] He states that about $130, 000 of ABS's gross income from the Software “is in jeopardy” each year.

         Defendants argue that Plaintiffs' declarations are vague and do not detail with precision the source or amount of Plaintiffs' damages. Even so, these declarations suffice under the legal certainty test. “‘[T]he legal certainty test makes it very difficult to secure a dismissal of a case on the ground that it does not appear to satisfy the jurisdictional amount requirement.'”[35] Only the following three situations “‘clearly meet the legal certainty standard: 1) when the terms of a contract limit the plaintiff's possible recovery; 2) when a specific rule of law or measure of damages limits the amount of damages recoverable; and 3) when independent facts show that the amount of damages was claimed merely to obtain federal court jurisdiction.'”[36] None of these situations exists here.

         Plaintiffs' declarations explain why Plaintiffs believe they have suffered more than $75, 000 in damages. The court's task is not to decide whether they will actually recover that amount, bur rather to determine whether it is a legal certainty they will not. Because there is no basis to conclude as much here, Defendants' Rule 12(b)(1) attacks will be denied.

         B. Defendants' Rule 12(b)(6) Arguments

         1. Rescission

         The parties agree that Plaintiffs' source code claims seek damages, not the rescission of any contract. Defendants argue that Plaintiffs cannot change their mind and later pursue rescission because a party cannot obtain both rescission and damages.[37] Although Defendants fashion this argument as arising under Rule 12(b)(6), they cite no authority in support of the proposition that a party may use a Rule 12(b)(6) motion to attack purely hypothetical claims. Because Defendants are seeking dismissal of non-existent claims, their argument fails.

         2. Count II

         Section 1.10(b) of the Operating Agreement states that LOS Global will convey the Software to eGlobal in its entirety.[38] Count II of the Complaint alleges that LOS Global is breaching its duty of good faith under the Operating Agreement by not conveying the source code to eGlobal.[39] At paragraph 48, Count II goes further, alleging that LOS Global is depriving Plaintiffs of the benefit of both the Operating Agreement and the Licensing Agreements.[40] Defendants take issue to this reference to the Licensing Agreements because LOS Global is not a party to those agreements.

         By not responding to Defendants' argument, Plaintiffs effectively concede that LOS Global owes no duties under the Licensing Agreements. To the extent that paragraph 48 claims ...

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