EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA ay a □□ Signed and Filed: December 18, 2019 □□□□□□□ 2 ah 4 DENNIS MONTALI 5 U.S. Bankruptcy Judge 6 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 In re ) Bankruptcy Case 10 ) No. 16-30063-DM YELLOW CAB COOPERATIVE, INC., ) 11 ) Chapter 11 12 Debtor. ) 13 ) ) 14 ||lRaNDY SUGARMAN, CHAPTER 11 ) Adversary Case No. 18-03075 15 TRUSTEE FOR YELLOW CAB ) COOPERATIVE, INC., ) Date: November 4, 2019 16 ) Time: 10:00 a.m. Plaintiff, ) Place: U.S. Bankruptcy Court 17 } Courtroom 17, 16th Floor ig ) San Francisco, CA 94102 ) 19 |}DOUGLAS A. TAYLOR, AND DOES 1- ) 10, ) 20 ) Defendants. 22 MEMORANDUM DECISION REGARDING DEFENDANT’S 23 MOTION TO DISMISS ADVERSARY PROCEEDING 24 On November 4, 2019, this court held a hearing on the motion 25 defendant Douglas A. Taylor (“Taylor”) to dismiss the Amended 26 |!Complaint for Professional Negligence, Accounting Malpractice, 27 Negligence (“Amended Complaint”) filed by plaintiff Randy 28 ||\Sugarman, the chapter 11 trustee (“Trustee”) for debtor Yellow -1-

1 Cab Cooperative, Inc. (“YCC”). For the reasons set forth below, 2 the court is denying Taylor’s motion to dismiss (the “MTD”). 3 A. The Amendments to The Complaint Give Rise to a Potential Defense to the In Pari Delicto Defense 4 5 In the initial complaint, Trustee asserted claims for 6 professional malpractice, accounting malpractice, and conspiracy 7 against Taylor, alleging that Taylor conspired or worked with 8 YCC’s officers and directors to permit improper distributions to 9 stakeholders and to shield assets from creditors. Applying 10 California law and precedent from the District Court for the 11 Northern District of California, this court held that the 12 doctrine of in pari delicto or “unclean hands” barred Trustee’s 13 claims and granted Taylor’s initial motion to dismiss, with 14 leave to amend. 15 The court concluded that the allegations of the initial 16 complaint that Taylor had conspired with YCC’s officers and 17 directors to divert funds from creditors precluded Trustee from 18 asserting the “adverse interest exception” to the “unclean 19 hands” doctrine. See Memorandum Decision Regarding Defendant’s 20 Motion to Dismiss Adversary Proceeding entered on April 29, 2019 21 at Dkt. No. 13, pp. 9-10. In particular, the allegation that 22 Taylor had conspired with all of YCC’s officers and directors 23 gave rise to the “sole actor defense” to Trustee’s “adverse 24 interest exception” and the Trustee’s claims were barred as a 25 matter of law. 26 In its Memorandum Decision, the court stated:

27 Taylor asserts that any damages arising from the alleged conduct were not caused by him, but by 28 YCC’s officers and directors, who have already settled with the Trustee. Causation is a factual 1 issue, and but for the claims being barred under the in pari delicto doctrine, Trustee has alleged 2 sufficient facts to survive a motion to dismiss 3 based on lack of causation.

4 That said, Trustee may have an independent claim for malpractice against Taylor not arising 5 from and independent of the alleged fraud of the 6 debtor and its members. The court will therefore dismiss all claims in the Complaint, with leave to 7 amend the accounting malpractice claim. 8 Id. at 10 (emphasis added). 9 In the Amended Complaint, Trustee no longer asserts a 10 conspiracy cause of action against Taylor, nor does he allege a 11 claim for fraud. Instead, the claims that he now asserts – 12 professional negligence, accounting malpractice, and negligence 13 – do not require a showing of intent or scienter by Taylor. 14 Nonetheless, Trustee has revised the initial complaint to allege 15 that Taylor conspired or acted with “certain of YCC’s officers 16 and directors, or a subset of YCC’s officers and directors, to 17 divest YCC of valuable and necessary assets to allow improper 18 distributions to YCC members[.]” See Amended Complaint at Dkt. 19 No. 19 at ¶ 12 (emphasis added); see also ¶ 13 of the Amended 20 Complaint. By alleging that Taylor acted with only a subset of 21 YCC’s officers, Trustee is attempting to foreclose any 22 application of the “sole actor” exception and the in pari 23 delicto defense that gave rise to dismissal of the initial 24 complaint. This allegation is sufficient to defeat Rule 12(b) 25 dismissal on the grounds that “unclean hands” bars Trustee’s 26 claims. In other words, these amendments give rise to a 27 potential defense to the in pari delicto defense. 28 B. The Court Cannot Base Dismissal on Inconsistencies Between 1 the Initial Complaint and the Amended Complaint 2 In his MTD, Taylor notes the inconsistencies between the 3 factual allegations of initial complaint (alleging that Taylor 4 conspired with YCC members) and the Amended Complaint (alleging 5 that Taylor conspired with a subset of YCC members). Taylor 6 argues that Trustee is bound by his initial allegations and thus 7 by the court’s initial decision to dismiss the adversary 8 proceeding on the grounds of in pari delicto, citing Airs 9 Aromatics, LLC v. Opinion Victoria’s Secret Stores Brand Mgmt., 10 Inc.,

(9th Cir. 2014). 11 In Airs Aromatics, the Ninth Circuit affirmed a dismissal 12 of an action without leave to amend, holding that amendment 13 would be futile because a “party cannot amend pleadings to 14 directly contradict an earlier assertion made in the same 15 proceeding.” There, a patent holder suing for infringement 16 contended that the patent was in “usage” during the relevant 17 time period because it was the subject of litigation. The 18 plaintiff admitted to the district court and in its Ninth 19 Circuit appellate briefs, however, that it was “not actively 20 using the marks” and “that its activity was ‘effectively on 21 hold’ during the period of litigation.” Because these admitted 22 facts would preclude the patent infringement action as a matter 23 of law, the district court concluded that leave to amend would 24 be futile.

25 In contrast, Trustee here has made no concessions which 26 would on their face defeat his claims for malpractice and 27 negligence. Therefore, this court will follow the line of Ninth 28 Circuit cases holding that “there is nothing in the Federal 1 Rules of Civil Procedure to prevent a party from filing 2 successive pleadings that make inconsistent or even 3 contradictory allegations[.]” PAE Gov’t Servs., Inc. v. MPRI, 4 Inc.,

(9th Cir. 2007). As stated in Williams 5 v. Cty. of Alameda,

(N.D. Cal. 2014): 6 Additionally, the Court will not consider any facts in the first amended complaint (“FAC”) that are not pled 7 in the SAC. In their motion papers, Defendants rely on 8 allegations in the FAC that are not present in the SAC to support their arguments for dismissal. However, it 9 is well-established that an amended pleading supersedes the original pleading and renders it of no 10 legal effect, unless the amended complaint 11 incorporates by reference portions of the prior pleading. . . . While prior pleadings may be 12 admissible in evidence against the pleader, the Court is bound to accept as true allegations in the 13 operative pleading on a motion to dismiss, and generally cannot consider evidence outside the 14 pleadings without converting a motion to dismiss into 15 a motion for summary judgment. 16

(multiple citations and quotations omitted; internal 17 footnote omitted) (emphasis added). In any event, amending the 18 complaint to add “certain” as a modifier to “officers and 19 directors” is not inherently contradictory. To the extent that 20 the Amended Complaint may be inconsistent with allegations made 21 in other state court proceedings, the court cannot address those 22 inconsistencies in the context of a motion to dismiss, as it 23 involves evidence outside the pleadings. 24 C. The Court Will Not Require Further Amendment 25 Trustee is not asserting a fraud claim against Taylor and 26 is no longer pursuing the conspiracy claim against him. 27 Nonetheless, paragraph 13 of the Amended Complaint does allege 28 that Taylor “was complicit with certain members or a subset of 1 members of YCC’s management’s to misrepresent YCC’s financial 2 health to its members, the California Office of Self-Insurance 3 Plans, to which YCC reported its compliance annually with 4 workers’ compensation self-insurance requirements, and the 5 California Department of Motor Vehicles, to which YCC reported 6 its compliance annually with commercial automobile liability 7 self-insurance regulations.” 8 While these allegations allude to some elements of a fraud 9 claim (misrepresentations), Trustee’s claims against Taylor are 10 not predicated on fraud, but on his alleged malpractice and 11 negligence. Moreover, Trustee was not a party to the 12 transactions between YCC and Taylor. Furthermore, the 13 allegations of paragraph 12 that Taylor “conspired” with a 14 subset of YCC’s officers and directors to divest YCC of assets, 15 to channel assets to an unrelated entity, and to funnel money 16 away from YCC and its creditors “to line the medallion holders’ 17 pockets at the expense of the financial health of YCC,” do not 18 implicate a claim for fraud. Consequently, the court will not 19 require Trustee to further amend the complaint to provide more 20 particular details under Federal Rule of Civil Procedure 9(b). 21 D. Conclusion 22 In light of the foregoing, the court is denying Taylor’s 23 MTD. Trustee should upload an order denying the motion for the 24 reasons set forth in this memorandum decision and comply with 25 B.L.R. 9022-1(c) before uploading the order. The order should 26 also reflect that a status conference will be held on January 27 31, 2020, at 1:30 p.m. 28 **END OF MEMORANDUM DECISION**