United States District Court, D. Arizona
Dominic W. Lanza United States District Judge.
before the Court is a motion to dismiss filed by Defendants
Schaffer's Bridal, LLC, Susan Hagedorn, and Gary M. Kirke
(collectively, “Defendants”). (Doc.
For the following reasons, the motion will be granted in part
and denied in part.
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:
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.)
2014, Lytikainen began providing services to Schaffer's
Bridal, including performing dress alterations and designing
and making bridal veils. (Id. ¶ 10.)
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
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.)
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.
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.)
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.)
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.)
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.)
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).
Securities Claims (Counts I and II)
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.
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
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.
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 ...