Lytikainen v. Schaffer's Bridal LLC

          ORDER

          Dominic W. Lanza United States District Judge.

         Pending before the Court is a motion to dismiss filed by Defendants Schaffer's Bridal, LLC, Susan Hagedorn, and Gary M. Kirke (collectively, “Defendants”). (Doc. 10.)^[1] For the following reasons, the motion will be granted in part and denied in part.

         BACKGROUND

         The facts pleaded in Plaintiff Elizabeth Reyes Lytikainen's complaint, which the Court accepts as true for the purpose of this motion to dismiss, are as follows:

         Defendants Hagedorn and Kirke are members of Schaffer's Bridal, LLC. (Doc. 1-4 ¶¶ 3, 4.) Schaffer's Bridal has two locations: one in Scottsdale, Arizona, and another in Des Moines, Iowa. (Id. ¶ 9.)

         In 2014, Lytikainen began providing services to Schaffer's Bridal, including performing dress alterations and designing and making bridal veils. (Id. ¶ 10.)

         In early 2015, “in response to [Lytikainen's] request for payment of substantial amounts owing to [her], ” Hagedorn, on behalf of Defendants, offered to sell Lytikainen a 50% interest in Schaffer's Bridal. (Id. ¶ 11.) The offer provided that Defendants would immediately transfer the 50% interest in Schaffer's Bridal in exchange for $100, 000 in cash and $400, 000 worth of veil and gown alteration services. (Id.) The offer also provided that Defendants would compensate Lytikainen $80, 000 per year to manage Schaffer's Bridal's Scottsdale location. (Id.)

         After Lytikainen accepted the offer, Hagedorn promised that Defendants would prepare documentation to reflect Lytikainen's ownership interest in Schaffer's Bridal. (Id. ¶ 12.) Shortly thereafter, Lytikainen began managing the Scottsdale location and received the promised salary. (Id. ¶ 13.)

         In September 2015, the Scottsdale location relocated within Scottsdale. (Id. ¶ 14.) Lytikainen continued to manage the Scottsdale location, at Hagedorn's instruction, but no longer received her promised salary. (Id.)

         In late 2015, Hagedorn assured Lytikainen that she would receive her management salary, payment owing for alterations and veils, and documentation confirming the transfer of her 50% interest in Schaffer's Bridal. (Id. ¶ 15.)

         In or around December 2015, Kirke and Hagedorn flew Lytikainen to Des Moines, Iowa and promised to finalize the transfer of the 50% interest in Schaffer's Bridal. (Id. ¶ 16.) At that meeting, Kirke introduced Lytikainen to others as his business partner and reiterated that the documentation reflecting her 50% interest in Schaffer's Bridal would be prepared. (Id. ¶ 17.)

         Through the first six months of 2017, Lytikainen continued to manage the Scottsdale location and continued to provide alteration services and veils to Schaffer's Bridal's Scottsdale and Des Moines locations. (Id. ¶ 19.) However, in or around July 2017, Lytikainen ceased her involvement with Schaffer's Bridal because Defendants hadn't paid her the promised management salary, or paid her the amounts owed for alterations and veils, or transferred the 50% interest in Schaffer's Bridal. (Id. ¶ 20.)

         “Throughout 2017 and early 2018, ” Defendants continued to promise to pay amounts owed to Lytikainen, including unpaid salary. (Id. ¶ 36.) In mid-2018, Defendants offered payment to Lytikainen, but it included “little or none of the past due salary owed to [Lytikainen] for managing the Scottsdale Schaffer's store.” (Id.)

         LEGAL STANDARD

         “[T]o survive a motion to dismiss, a party must allege ‘sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'” In re Fitness Holdings Int'l, Inc., 714 F.3d 1141, 1144 (9th Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “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. (quoting Iqbal, 556 U.S. at 678). “[A]ll well-pleaded allegations of material fact in the complaint are accepted as true and are construed in the light most favorable to the non-moving party.” Id. at 1144-45 (citation omitted). However, the court need not accept legal conclusions couched as factual allegations. Iqbal, 556 U.S. at 679-80. The court also may dismiss due to “a lack of a cognizable legal theory.” Mollett v. Netflix, Inc., 795 F.3d 1062, 1065 (9th Cir. 2015) (citation omitted).

         ANALYSIS

         I. Securities Claims (Counts I and II)^[2]

         Defendants move to dismiss Lytikainen's securities claims because: (1) the interest in Schaffer's Bridal on which her securities claims is premised isn't a “security” within the meaning of the Rule 10b-5; (2) Lytikainen doesn't plead a sufficient nexus between the alleged fraud and the sale of a security; and (3) Lytikainen doesn't plead her securities claims with adequate particularity as required by Rule 9(b). (Doc. 10 at 4-10.) The Court agrees with Defendants' first argument and will therefore dismiss Counts I and II.

         Lytikainen alleges the “security” at issue is a 50% stake in Schaffer's Bridal. (Doc. 1-4 ¶¶ 22, 31.) Because Schaffer's Bridal is a limited liability company, Defendants argue, Lytikainen's interest can only be a “security” if it constitutes an “investment contract” under the Securities Exchange Act. (Doc. 10 at 5.) Defendants contend Lytikainen's interest doesn't qualify because an investment contract is an “investment of money in a common scheme or enterprise with the expectation of profits to come solely from the efforts of others.” (Id. at 5-6, emphasis added.) Defendants assert the profits from Schaffer's Bridal don't come solely from the efforts of others-the complaint alleges Lytikainen managed a Schaffer's Bridal location and provided alteration services. (Id. at 5.) Defendants thus conclude that, because Lytikainen is an active participant in Schaffer's Bridal, her interest can't constitute an investment contract and isn't a “security.” (Id.)

         “[C]ourts tasked with deciding whether LLC membership interests constitute a security under the Exchange Act generally evaluate whether such interests are ‘investment contracts . . . .'” D.R. Mason Constr. Co. v. GBOD, LLC, 2018 WL 1306425, *5 (S.D. Cal. 2018). The three requirements for establishing an investment contract are: (1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits to be derived solely from the efforts of others. Secs. & Exch. Comm 'n v. W.J. Howey Co., 328 U.S. 293, 298 (1946). Here, the third prong is at issue-whether the expected profits would be derived “solely” from others' efforts.

         The Ninth Circuit's seminal case on the meaning of “solely” in this context is Securities & Exchange Commission v. Glenn W. Turner Enterprises, Inc.,474 F.2d 476 (9th Cir. 1973). There, the court clarified that “the word ‘solely' should not be read as a strict or literal limitation” but must be “construed realistically, so as to include within the definition those schemes which involve in substance, if not form, securities.” Id. at 482. Based on this clarification, the court held that an investment may qualify as an “investment contract” within the Securities Exchange Act if “the efforts ...