Ironridge Global Partners, LLC Wins Federal Court Action by ScripsAmerica, Inc.

ScripsAmerica, Inc. v. Ironridge Global LLC, 56 F.Supp.3d 1121 (2014)

2015 Thomson Reuters. No claim to original U.S. Government Works. 1

56 F.Supp.3d 1121United States District Court,

C.D. California.

SCRIPSAMERICA, INC., Plaintiff,v.

IRONRIDGE GLOBAL LLC d/b/a IronridgeGlobal IV, Ltd., John Kirkland, Brendan

O'Neil, and Does 15, Defendants.

Case No. CV 1403962 MMM(AGRx). | Signed Nov. 3, 2014.

SynopsisBackground: Corporation that issued shares of its commonstock to limited liability company (LLC) in return for LLC'spayment of its outstanding accounts payable brought actionagainst LLC and its directors, asserting claims for securitiesfraud, breach of contract, tortious bad faith, and declaratoryrelief, arising out of defendants' allegedly fraudulent schemeto manipulate corporation's stock price to obtain additionalshares. Defendants moved to dismiss, or, alternatively to stay.

Holdings: The District Court, Margaret M. Morrow, J., heldthat:

[1] RookerFeldman doctrine did not bar corporation frombringing claims for securities fraud, breach of contract, andbreach of implied covenants; but

[2] RookerFeldman doctrine barred in part corporation'sdeclaratory relief claim;

[3] Younger abstention was not warranted;

[4] threshold requirement of parallel federal and state actions,for application of Colorado River abstention, was met;

[5] balance of factors weighed in favor of stay under theColorado River abstention doctrine;

[6] corporation failed to plead with particularity conductconstituting market manipulation, as required to state asecurities fraud claim; and

[7] corporation failed to allege reliance on LLC's allegedlyfraudulent statements.

Motion to dismiss granted in part and denied in part, andmotion to stay granted.

West Headnotes (69)

[1] EvidenceRecords and decisions in other actions or

proceedingsEvidence

Proceedings in other courtsDistrict Court would take judicial notice ofvarious documents related to corporation'searlier state court breach of contract actionagainst limited liability company (LLC) andits directors, on motion to dismiss, for failureto state a claim, corporation's later actionasserting claims for securities fraud, breachof contract, tortious bad faith, and declaratoryrelief, arising out of LLC and directors' allegedlyfraudulent scheme to manipulate corporation'sstock price to obtain additional shares of itscommon stock under their agreement pursuant towhich corporation issued shares of its commonstock to LLC in return for LLC's payment ofits outstanding accounts payable, where thosedocuments bore directly on whether the DistrictCourt could properly exercise jurisdiction overthe case. Fed.Rules Civ.Proc.Rule 12(b)(6), 28U.S.C.A.

Cases that cite this headnote

[2] Federal Civil ProcedureMatters considered in general

Because review on a motion to dismiss forfailure to state a claim is confined to thecomplaint, the court typically does not considermaterial outside the pleadings, for example,facts presented in briefs, affidavits, or discoverymaterials, in deciding such a motion; however,it may properly consider exhibits attached tothe complaint and documents whose contentsare alleged in the complaint but not attached,if their authenticity is not questioned. Fed.RulesCiv.Proc.Rule 12(b)(6), 28 U.S.C.A.




[3] Federal Civil ProcedureMatters considered in general

Federal Civil ProcedureMotion

Taking judicial notice of matters of public recorddoes not convert a motion to dismiss into amotion for summary judgment.


[4] Federal Civil ProcedureMatters deemed admitted; acceptance as

true of allegations in complaintOn a motion to dismiss for failure to state aclaim, the court is not required to accept as trueconclusory allegations which are contradictedby documents referred to in the complaint.Fed.Rules Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.


[5] EvidenceRecords and decisions in other actions or

proceedingsEvidence

Proceedings in other courtsFederal courts may take judicial notice of relatedstate court orders and proceedings. Fed.RulesEvid.Rule 201(b), 28 U.S.C.A.


[6] CourtsFederal-Court Review of State-Court

Decisions; Rooker-Feldman DoctrineUnder the RookerFeldman doctrine, a federaldistrict court does not have subject matterjurisdiction to hear a direct appeal from a finaljudgment of a state court.

2 Cases that cite this headnote

[7] Courts

Federal-Court Review of State-CourtDecisions; Rooker-Feldman DoctrineA losing party in state court is barred by theRookerFeldman doctrine from seeking what insubstance would be appellate review of a statejudgment in federal district court, even if theparty contends the state judgment violated his orher federal rights.



Decisions; Rooker-Feldman DoctrineWhen there is parallel state and federal litigation,the RookerFeldman doctrine is not triggeredsimply by the entry of judgment in state court.



Decisions; Rooker-Feldman DoctrineProceedings end for RookerFeldman purposeswhen the state courts finally resolve the issuethat the federal court plaintiff seeks to relitigatein a federal forum, even if other issues remainpending at the state level; thus, when a federalaction is filed while the state court actioncontinues in the appeals process in state court,the state proceedings have not ended.



Decisions; Rooker-Feldman DoctrineThe RookerFeldman doctrine precludes theexercise of jurisdiction not only over claims thatare de facto appeals of a state court decisionbut also over suits that raise issues that areinextricably intertwined with an issue resolvedby the state court.


[11] Courts



Federal-Court Review of State-CourtDecisions; Rooker-Feldman DoctrineIf claims raised in the federal court action areinextricably intertwined with the state court'sdecision such that the adjudication of the federalclaims would undercut the state ruling or requirethe district court to interpret the application ofstate laws or procedural rules, then the federalcomplaint must be dismissed for lack of subjectmatter jurisdiction, pursuant to the RookerFeldman doctrine.



Decisions; Rooker-Feldman DoctrineIn determining whether a plaintiff's federalclaims are inextricably intertwined with a statecourt decision, for purposes of the RookerFeldman doctrine, a court cannot simplycompare the issues involved in the state courtproceeding to those raised in the federal courtplaintiff; rather, it must pay close attention to therelief sought by the federal court plaintiff.


[13] CourtsParticular Cases and Contexts

CourtsFraud

Claims for securities fraud, breach of contract,and breach of implied covenants assertedby corporation that issued shares of itscommon stock to limited liability company(LLC) in return for LLC's payment of itsoutstanding accounts payable were independentfrom corporation's previously dismissed breachof contract claim, and, thus, corporation'scomplaint was not a de facto appeal from earlierfinal state court judgment dismissing its breachof contract claim, as would be barred by theRookerFeldman doctrine, where the claimssought damages, not to invalidate the parties'agreement or earlier state court order approvingstipulation that embodied it.



Decisions; Rooker-Feldman DoctrineA settlement agreement may constitute a statecourt judgment for purposes of the RookerFeldman doctrine.



Declaratory relief claim asserted by corporationthat issued shares of its common stock to limitedliability company (LLC) in return for LLC'spayment of its outstanding accounts payable,requesting the District Court to declare thatcorporation had no obligation to comply withstate court's earlier stipulated judgment to extentit compelled it to accede to LLC's demands forissuance of shares in addition to those that statecourt directed be issued in its enforcement order,was barred by the RookerFeldman doctrine,where it was equivalent to a request that theDistrict Court declare the state court orderapproving the stipulation, and making it anenforceable judgment, void.



Declaratory relief claim asserted by corporationthat issued shares of its common stock to limitedliability company (LLC) in return for LLC'spayment of its outstanding accounts payable,requesting the District Court to declare thatcorporation had no obligation to issue additionalshares to LLC, was not barred by the RookerFeldman doctrine, where state court's judgmentdenying LLC's claims for additional shares wason appeal and was not yet final.


[17] Federal Courts



Younger abstentionUnder the Younger abstention doctrine, federalcourts must abstain from hearing cases thatwould interfere with pending state courtproceedings that implicate important stateinterests.


[18] Federal CourtsYounger abstention

The Younger abstention doctrine is justified byconsiderations of comity; a proper respect forstate functions, a recognition of the fact thatthe entire country is made up of a union ofseparate state governments, and a continuanceof the belief that the national government willfare best if the states and their institutions are leftfree to perform their separate functions in theirseparate ways.



Absent extraordinary circumstances, Youngerabstention in favor of state judicial proceedingsis required if the state proceedings: (1) areongoing, (2) implicate important state interests;and (3) provide the plaintiff an adequateopportunity to litigate federal claims.



Younger abstention is appropriate only when thefederal action enjoins the state court proceedingsor has the practical effect of doing so.


[21] Federal CourtsStay

If, in a case in which the plaintiff seeks damages,the court determines that Younger abstention isappropriate, it should stay the matter until the

state court proceedings are concluded, ratherthan dismissing the action.


[22] Federal CourtsDeclaratory judgment

Federal CourtsTorts in general

Federal CourtsContracts

Federal CourtsSecurities regulation

Younger abstention was not warranted in actionbrought in federal court by corporation, thatissued shares of its common stock to limitedliability company (LLC) in return for LLC'spayment of its outstanding accounts payable,against LLC and its directors, asserting claimsfor securities fraud, breach of contract, tortiousbad faith, and declaratory relief, arising outof defendants' allegedly fraudulent scheme tomanipulate corporation's stock price to obtainadditional shares, although LLC's enforcementproceedings against corporation were ongoingon appeal in state court, where California did nothave substantial interest in enforcing stipulatedjudgment in the enforcement proceedings.



For Younger abstention purposes, the state'strial-and-appeals process is treated as a unitarysystem, and for a federal court to disrupt itsintegrity by intervening in mid-process woulddemonstrate a lack of respect for the state assovereign.



A necessary concomitant of Younger abstentionis that a party wishing to contest in federalcourt the judgment of a state judicial tribunal



must exhaust his state appellate remedies beforeseeking relief in the federal court.


[25] Federal CourtsColorado River abstention

Federal CourtsStay

To decide whether a particular case presentsthe exceptional circumstances that warrant aColorado River stay or dismissal, the districtcourt must carefully consider both the obligationto exercise jurisdiction and the combination offactors counseling against that exercise.



Federal CourtsStay

The factors relevant to assessing the proprietyof a stay or dismissal under the Colorado Riverabstention doctrine are subjected to a flexiblebalancing test, in which one factor may beaccorded substantially more weight than anotherdepending on the circumstances of the case, andwith the balance heavily weighted in favor of theexercise of jurisdiction.



The threshold question in deciding whetherColorado River abstention is appropriate iswhether there are parallel federal and state suits;exact parallelism between the two suits is notrequired, and it is enough if the two proceedingsare substantially similar.



The inquiry into whether there are parallelfederal and state suits, as required for ColoradoRiver abstention, examines whether the suitsinvolve the same parties and the same claims,and whether the disputes involve, in a moregeneral sense, the same facts.



Federal CourtsStay

In determining whether two suits aresubstantially similar, if the district court hasa substantial doubt as to whether the stateproceedings will resolve the federal action, thedoubt precludes the granting of a Colorado Riverstay.



Federal CourtsStay

A district court may enter a Colorado Riverstay order only if it has full confidence that theparallel state proceeding will end the litigation.


[31] Federal CourtsDeclaratory judgment

Federal CourtsTorts in general

Federal CourtsContracts

Threshold requirement of parallel federal andstate actions was met, as required for applicationof Colorado River abstention in federal courtaction brought by corporation, that issued sharesof its common stock to limited liability company(LLC) in return for LLC's payment of itsoutstanding accounts payable, against LLC andits directors, asserting claims for breach ofcontract, tortious bad faith, and declaratory



relief, arising out of defendants' allegedlyfraudulent scheme to manipulate corporation'sstock price to obtain additional shares, whereLLC's state court enforcement proceedings andcorporation's federal court action involved sameparties and substantially similar claims, andcorporation sought substantially identical reliefin both actions, namely, to avoid having toissue more shares of stock pursuant to stipulatedjudgment in enforcement proceedings.


[32] Federal CourtsIn rem and quasi in rem proceedings

In proceedings in rem or quasi in rem, the forumfirst assuming custody of the property at issuehas exclusive jurisdiction to proceed.



Piecemeal litigation occurs, as would supportColorado River abstention, when differenttribunals consider the same issue, therebyduplicating efforts and possibly reachingdifferent results.



The mere possibility of piecemeal litigationdoes not constitute an exceptional circumstance,as would support Colorado River abstention;rather, the case must raise a special concern aboutpiecemeal litigation, which can be remedied bystaying or dismissing the federal proceeding.



Desire to avoid piecemeal litigation factor didnot weigh in favor of stay under the ColoradoRiver abstention doctrine, in federal court actionbrought by corporation, that issued shares of

its common stock to limited liability company(LLC) in return for LLC's payment of itsoutstanding accounts payable, against LLC andits directors, asserting claims for breach ofcontract, tortious bad faith, and declaratoryrelief, arising out of defendants' allegedlyfraudulent scheme to manipulate corporation'sstock price to obtain additional shares, wherefederal court action and LLC's state court actionto enforce stipulated judgment raised the sameissues and adjudication of federal case wouldinvolve addressing many, if not all, of the sameissues that were being litigated in state court;order in state court enforcement proceedingsrequired corporation to issue additional shares ofstock to LLC, and corporation in its federal courtaction sought to avoid doing so.



For purposes of Colorado River abstention factorregarding order in which the forums obtainedjurisdiction, priority should not be measuredexclusively by which complaint was filed first,but rather in terms of how much progress hasbeen made in the two actions.



Order in which the forums obtained jurisdictionweighed in favor of stay under the ColoradoRiver abstention doctrine, in federal court actionbrought by corporation, that issued shares ofits common stock to limited liability company(LLC) in return for LLC's payment of itsoutstanding accounts payable, against LLC andits directors, asserting claims for breach ofcontract, tortious bad faith, and declaratoryrelief, arising out of defendants' allegedlyfraudulent scheme to manipulate corporation'sstock price to obtain additional shares, whereLLC's parallel state court enforcement actionagainst corporation was filed first and had



progressed substantially further than the federalaction.



Presence of state law issues weighed againststay under the Colorado River abstentiondoctrine, in federal court action brought bycorporation, that issued shares of its commonstock to limited liability company (LLC) inreturn for LLC's payment of its outstandingaccounts payable, against LLC and its directors,asserting claims for breach of contract, tortiousbad faith, and declaratory relief, arising outof defendants' allegedly fraudulent scheme tomanipulate corporation's stock price to obtainadditional shares, although corporation's claimsarose under state law, and state law wouldtherefore provide rule of decision with respectto those claims, where corporation's state lawclaims involved routine issues of state law thatfederal court was fully capable of deciding.



Federal CourtsStay

A district court may not stay or dismiss thefederal proceeding under the Colorado Riverabstention doctrine if the state proceeding cannotadequately protect the rights of the federallitigants; for example, if there is a possibility thatthe parties will not be able to raise their claimsin the state proceeding, a stay or dismissal isinappropriate.



Factor whether state court proceeding couldadequately protect rights of the federal litigantswas of little or no weight in determiningwhether stay was warranted under the Colorado

River abstention doctrine, in federal court actionbrought by corporation, that issued shares ofits common stock to limited liability company(LLC) in return for LLC's payment of itsoutstanding accounts payable, against LLC andits directors, asserting claims for breach ofcontract, tortious bad faith, and declaratoryrelief, arising out of defendants' allegedlyfraudulent scheme to manipulate corporation'sstock price to obtain additional shares, wherecorporation's claims asserted involved issues ofstate law.



Under forum shopping factor of Colorado Riverabstention doctrine, courts may consider thevexatious or reactive nature of either the federalor the state litigation.



Factor regarding desire to avoid forum shoppingweighed slightly in favor of stay under theColorado River abstention doctrine, in federalcourt action brought by corporation, that issuedshares of its common stock to limited liabilitycompany (LLC) in return for LLC's payment ofits outstanding accounts payable, against LLCand its directors, asserting claims for breachof contract, tortious bad faith, and declaratoryrelief, arising out of defendants' allegedlyfraudulent scheme to manipulate corporation'sstock price to obtain additional shares, wherecorporation filed the action only days after itappealed state court's enforcement order thatimplicitly rejected claims that LLC breachedstipulation's express and implied terms and thatrequired corporation to issue additional shares ofstock to LLC.


[43] Federal Courts



Colorado River abstentionFederal Courts

StayWhen a district court decides to dismiss or stayunder Colorado River, it presumably concludesthat the parallel state court litigation will be anadequate vehicle for the complete and promptresolution of the issues between the parties; ifthere is any substantial doubt as to this, it wouldbe a serious abuse of discretion to grant the stayor dismissal at all.



State court proceedings would conclusivelyresolve all issues pending in federal court,weighing in favor of stay under the ColoradoRiver abstention doctrine, in federal court actionbrought by corporation that issued shares ofits common stock to limited liability company(LLC) in return for LLC's payment of itsoutstanding accounts payable brought actionagainst LLC and its directors, asserting claimsfor breach of contract, tortious bad faith, anddeclaratory relief, arising out of defendants'allegedly fraudulent scheme to manipulatecorporation's stock price to obtain additionalshares, where only critical difference betweenstate and federal actions was presence ofa securities fraud claim that could not beadjudicated in state court, and corporation'sdefenses to enforcement order in state courtwould have preclusive effect on its claims forbreach of contract, breach of implied covenant,and declaratory relief in the federal action.


[45] JudgmentNature and requisites of former recovery as

bar in generalJudgment

Nature and requisites of former adjudicationas ground of estoppel in generalRes judicata describes the preclusive effect ofa final judgment on the merits: res judicata,

or claim preclusion, prevents relitigation of thesame cause of action in a second suit between thesame parties or parties in privity with them, andcollateral estoppel, or issue preclusion, precludesrelitigation of issues argued and decided in priorproceedings.


[46] JudgmentMatters actually litigated and determined

JudgmentEssentials of Adjudication

In the case of issue preclusion, it must appearthat the first matter presented some issue that isnecessary to the later claim or defense, and thatthe issue was actually litigated and necessarilydecided.


[47] JudgmentMatters for defense in former action as

cause of action in secondJudgment

Matters which might have been litigatedIssue preclusion bars later claims based on issuesthat were raised or could have been raised asaffirmative defenses in the former action.


[48] Federal CourtsInferior courts

Although a district court is not bound byunpublished decisions of intermediate statecourts, unpublished opinions that are supportedby reasoned analysis may be treated aspersuasive authority.


[49] JudgmentMatters actually litigated and determined

Under California law, an issue is actuallylitigated, for res judicata purposes, when it isproperly raised by the pleadings or otherwise,



is submitted for determination and is actuallydetermined.


[50] Securities RegulationPleading

A securities fraud complaint under 10(b)and Rule 10b5 must satisfy the dualpleading requisites of rule requiring that,in all averments of fraud or mistake, thecircumstances constituting fraud or mistakebe stated with particularity and the PrivateSecurities Litigation Reform Act (PSLRA).Private Securities Litigation Reform Act of1995, 101(b), 15 U.S.C.A. 78u4; Fed.RulesCiv.Proc.Rule 9(b), 28 U.S.C.A.


[51] Federal Civil ProcedureFraud, mistake and condition of mind

Generally, a plaintiff must plead withparticularity the time and place of the fraud,the statements made and by whom made, anexplanation of why or how such statements werefalse or misleading when made, and the role ofeach defendant in the alleged fraud. Fed.RulesCiv.Proc.Rule 9(b), 28 U.S.C.A.


[52] Securities RegulationMisrepresentation

A securities fraud claim cannot survive a motionto dismiss merely by alleging that certainstatements were false; it must also providespecifics concerning who made the statementand when it was made. Securities Exchange Actof 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b5; Fed.Rules Civ.Proc.Rule 9(b), 28U.S.C.A.



The Private Securities Litigation Reform Act's(PSLRA) pleading requirements prevent aplaintiff from skirting dismissal by filing asecurities fraud complaint laden with vagueallegations of deception unaccompanied bya particularized explanation stating why thedefendant's alleged statements or omissions aredeceitful. Securities Exchange Act of 1934, 10(b), 21D(b), 15 U.S.C.A. 78j(b), 78u4(b);17 C.F.R. 240.10b5.


[54] Securities RegulationManipulative, Deceptive or Fraudulent

ConductRegardless of whether a securities fraudplaintiff alleges a misrepresentation, omission,or manipulation, he must plead and prove thefollowing elements: (1) use or employment of amanipulative or deceptive device or contrivance;(2) scienter, that is, a wrongful state of mind;(3) a connection with the purchase or sale ofa security; (4) reliance, often referred to astransaction causation; (5) economic loss; and(6) loss causation, that is, a causal connectionbetween the manipulative or deceptive deviceor contrivance and the loss. Securities ExchangeAct of 1934, 10(b), 15 U.S.C.A. 78j(b); 17C.F.R. 240.10b5.


[55] Securities RegulationScienter

For purposes of the Private Securities LitigationReform Act's (PSLRA) requirement that asecurities fraud complaint must state withparticularity facts giving rise to a stronginference that the defendant acted with therequired state of mind, scienter refers toa mental state embracing intent to deceive,manipulate, or defraud. Private SecuritiesLitigation Reform Act of 1995, 101(b), 15U.S.C.A. 78u4(b)(2).





The requisite state of mind, under the PrivateSecurities Litigation Reform Act (PSLRA), mustbe a departure from the standards of ordinarycare that presents a danger of misleading buyersthat is either known to the defendant or soobvious that the actor must have been aware ofit. Private Securities Litigation Reform Act of1995, 101(b), 15 U.S.C.A. 78u4(b)(2).



If a securities fraud plaintiff relies on allegationsof recklessness, the Private Securities LitigationReform Act's (PSLRA) pleading standardrequires that it state specific facts indicatingno less than a degree of recklessness thatstrongly suggests actual intent. Private SecuritiesLitigation Reform Act of 1995, 101(b), 15U.S.C.A. 78u4(b)(2).



To qualify as strong within the intendmentof the Private Securities Litigation Reform Act(PSLRA), an inference of scienter must bemore than merely plausible or reasonable; itmust be cogent and at least as compelling asany opposing inference of nonfraudulent intent.Private Securities Litigation Reform Act of1995, 101(b), 15 U.S.C.A. 78u4(b)(2).



Courts must consider a securities fraudcomplaint in its entirety, as well as othersources courts ordinarily examine, when rulingon motions to dismiss for failure to statea claim; the inquiry is whether all of thefacts alleged, taken collectively, give rise to

a strong inference of scienter, as required bythe Private Securities Litigation Reform Act(PSLRA), not whether any individual allegation,scrutinized in isolation, meets that standard.Private Securities Litigation Reform Act of1995, 101(b), 15 U.S.C.A. 78u4(b)(2);Fed.Rules Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.



In determining whether a securities fraudplaintiff has alleged facts giving rise to a stronginference of scienter, as required by the PrivateSecurities Litigation Reform Act (PSLRA), thecourt must draw all reasonable inferences fromthe allegations presented, including inferencesunfavorable to plaintiffs; however, the inferencethat the defendant acted with scienter need notbe irrefutable, that is, of the smoking-gungenre, or even the most plausible of competinginferences. Private Securities Litigation ReformAct of 1995, 101(b), 15 U.S.C.A. 78u4(b)(2).



To adequately plead a securities fraud claimunder the Private Securities Litigation ReformAct (PSLRA), the inference of scienter mustbe more than merely reasonable or permissible;rather, it must be cogent and compelling inlight of other explanations. Private SecuritiesLitigation Reform Act of 1995, 101(b), 15U.S.C.A. 78u4(b)(2).



Corporation that issued shares of its commonstock to limited liability company (LLC)in return for LLC's payment of itsoutstanding accounts payable failed to pleadwith particularity conduct constituting market



manipulation, as required to state a securitiesfraud claim under the Private SecuritiesLitigation Reform Act (PSLRA) against LLCand its directors, arising out of defendants'allegedly fraudulent scheme to manipulatecorporation's stock price to obtain additionalshares, where it alleged only that LLC sold moreshares than it purportedly agreed to sell withina given period, which violated alleged oralagreement not to sell an amount of corporation'sstock that exceeded 10 % of total shares traded onany given day; terms of parties' agreement werefully disclosed. Securities Exchange Act of 1934, 10(b), 21D(b)(1), 15 U.S.C.A. 78j(b),78u4(b)(1); 17 C.F.R. 240.10b5; Fed.RulesCiv.Proc.Rule 9(b), 28 U.S.C.A.


[63] Securities RegulationFraud on the market; price manipulation

For purposes of a securities fraud claim,deception arises when an investor is erroneouslyled to believe that the price of the security inquestion is driven by the natural interplay ofsupply and demand, not rigged by manipulators;since nondisclosure is usually essential to thesuccess of a manipulative scheme, the marketis not misled when a transaction's terms arefully disclosed. Securities Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b5.


[64] Securities RegulationReliance

Corporation that issued shares of its commonstock to limited liability company (LLC) inreturn for LLC's payment of its outstandingaccounts payable failed to allege reliance onLLC's allegedly fraudulent statements made aspart of scheme to manipulate corporation's stockprice to obtain additional shares, as required toplead a securities fraud claim under either amisrepresentation or manipulation theory, whereparties' stipulation stated that it contained allrelevant representations and warranties, and

none of its provisions restricted LLC from sellingshares corporation issued to it, and corporationdid not allege that it was damaged because itassumed and relied on an efficient market freeof manipulation, but, rather, it alleged it wasdefrauded by LLC and suffered damages as aresult of LLC's breach of the stipulation andtortious bad faith. Securities Exchange Act of1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b5.


[65] Securities RegulationReliance

Reliance by the plaintiff upon the defendant'sdeceptive acts is an essential element ofa private cause of action for securitiesfraud; it ensures that, for liability to arise,the requisite causal connection between adefendant's misrepresentation and a plaintiff'sinjury exists as a predicate for liability. SecuritiesExchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b5.


[66] Securities RegulationFraud on the market

In a securities fraud case, reliance can bepresumed under the fraud on the markettheory when the alleged misrepresentations weredisseminated in an impersonal, well developedsecurities market. Securities Exchange Act of1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b5.


[67] Securities RegulationFraud on the market

To plead reliance adequately for purposes ofa securities fraud claim based upon marketmanipulation, a plaintiff must allege that it reliedon an assumption of an efficient market free ofmanipulation. Securities Exchange Act of 1934, 10(b), 15 U.S.C.A. 78j(b); 17 C.F.R. 240.10b5.





Corporation that issued shares of its commonstock to limited liability company (LLC) inreturn for LLC's payment of its outstandingaccounts payable failed to plead particularizedfacts giving rise to a strong inference ofscienter, as required under the Private SecuritiesLitigation Reform Act (PSLRA) to state asecurities fraud claim against LLC and itsdirectors, arising out of defendants' allegedlyfraudulent scheme to manipulate corporation'sstock price to obtain additional shares, whereallegations referring to scheme to defraud andmanipulate were conclusory and did not raiseclaim above speculative level, especially in lightof terms of parties' stipulation providing thatshares could be immediately resold withoutrestriction, and warning that issuance could havesubstantial dilutive effect. Securities ExchangeAct of 1934, 10(b), 21D(b)(2), 15 U.S.C.A. 78j(b), 78u4(b)(2); 17 C.F.R. 240.10b5.



A securities fraud complaint fails to allege losscausation if it does not provide a defendantwith notice of what the relevant economic lossmight be or of what the causal connection mightbe between that loss and the misrepresentation;stated in the affirmative, the complaint mustallege that the defendant's share price fellsignificantly after the truth became known or themanipulation took place. Securities ExchangeAct of 1934, 10(b), 15 U.S.C.A. 78j(b); 17C.F.R. 240.10b5.


Attorneys and Law Firms

*1130 Carlos E. Needham, Carlos Needham Law Offices,Valencia, CA, for Plaintiff.

Shannon Edward Mader, Gibson Dunn and Crutcher LLP,Los Angeles, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING INPART DEFENDANTS' MOTION TO DISMISS AND

GRANTING DEFENDANTS' MOTION TO STAY

MARGARET M. MORROW, District Judge.

On May 22, 2014, ScripsAmerica, Inc. (Scrips) filed thisaction against Ironridge Global LLC d/b/a Ironridge GlobalIV, Ltd., John Kirkland, and Brendan O'Neil (collectivelyIronridge), as well as certain fictitious defendants. 1 Thecomplaint alleges claims for securities fraud, breach ofcontract, tortious bad faith, and declaratory relief. The claimsarise from an allegedly fraudulent scheme to manipulateScrips' stock price in order to obtain additional shares ofthe stock under an *1131 agreement between the partiespursuant to which Ironridge would pay off certain of Scrips'accounts payable in exchange for issuance of stock set by anagreed upon formula. 2

On June 25, 2014, defendants filed a motion to dismiss, oralternatively to stay. 3 Scrips opposes the motion. 4

I. FACTUAL BACKGROUND

This action arises out of an allegedly fraudulent schemedevised by Ironridge. Scrips is a pharmaceuticals distributorwhose stock is publicly traded on the over-the-counter(OTC) market. Ironridge's purported scheme involved theissuance of Scrips' common stock to Ironridge in exchangefor an undertaking by Ironridge to pay Scrips' outstandingaccounts payable. 5 Scrips alleges that the transaction wasfirst proposed during a telephone call it received from JohnKirkland and Brendan O'Neildirectors of IronridgeonAugust 28, 2013. 6 It contends that Kirkland and O'Neil toldScrips' chief executive officer, Robert Schneiderman, thatIronridge could pay Scrips' accounts payable, which totaledapproximately $700,000, in exchange for an amount of Scripsstock to be determined by contractual formula. 7 Kirkland



and O'Neil explained that to effect the exchange, Scrips didnot need to register the shares before transferring them toIronridge. The parties discussed the transaction further onSeptember 4 and October 2, 2013. 8

During the calls, Ironridge requested that the contractmemorializing the transaction include a provision for anadjustment to protect it in the event of a decline in Scrips'stock price. 9 Scrips allegedly agreed to the inclusion of sucha provision, pursuant to which Ironridge was to receive morestock than the originally agreed amount if Scrips' stock pricedeclined following consummation of the transaction. 10 Theadjustment mechanism was outlined, together with certainother terms, in a term sheet Ironridge prepared and gaveto Scrips. 11 Scrips contends that Ironridge, Kirkland, andO'Neil did not disclose their intention to manipulate themarket for Scrips shares in order to reduce the share priceand increase the number of shares Ironridge was entitled toreceive under the agreement. 12

On October 4, 2013, Schneiderman, Kirkland, and O'Neilpurportedly discussed the potential effect Ironridge's saleof the stock it received might have on Scrips' share price.Unlike other entities that had funded Scrips in exchangefor stock, Ironridge allegedly represented that it would notact to manipulate or otherwise affect Scrips' stock price. 13

Specifically, Ironridge purportedly said that its sales of Scripsshares would never be more than ten percent of the volumeof sales on any *1132 given day. 14 Scrips contendsthat Ironridge's representations were knowingly and wilfullyfalse. 15

Because the shares were unregistered, Ironridge and Scripshad to obtain court approval under California and federalsecurities laws before a transfer of the stock could takeplace. 16 Thus, on October 11, 2013, Ironridge filed a breachof contract complaint in Los Angeles Superior Court thatsought to collect the accounts payable debts; it sued as thesuccessor in interest to Scrips' creditors under receivablespurchase agreements into which it had entered with thecreditors. 17 Ironridge and Scrips then submitted a stipulationto the court that was the means by which the exchangetransaction was to be effected. The stipulation provided thatScrips would transfer 8,690,000 shares of stock to Ironridgein satisfaction of $686,962.08 in debt owned by Ironridge. 18The shares were to be unrestricted and freely tradeable

exempted shares of Scrips common stock. 19 The stipulationstated the shares had to be capable of being immediatelyresold ... without restriction, 20 and noted that Ironridgecould sell any of its shares of [Scrips] common stock issuedpursuant to the [stipulation] at any time. 21 The stipulationwarned that issuance of the shares could have a dilutiveeffect [on Scrips' stock], which [might] be substantial. 22

The stipulation also memorialized the adjustment mechanismthe parties had previously discussed. First, Scrips wouldimmediately issue and deliver to Ironridge 8,690,000 sharesof its common stock; the issuance, however, was subjectto certain adjustments, issuances, returns, and ownershiplimitations. 23 Future adjustments were to be made basedon trading activity in Scrips stock during the calculationperiod. 24 The final amount of shares to which Ironridgewas entitled was to be calculated by taking (a) the sum ofthe claim amount [i.e., $686,962.08], 10 % of third partyagent fees, and Ironridge's reasonable *1133 attorneys' feesand expenses, and dividing it by (b) 80 % of the following:the closing price of Scrips common stock on the tradingday immediately preceding the date the state court enteredan order on the stipulation; the resulting number was notto exceed the arithmetic average of the individual volumeweighted average price of any five trading days during thecalculation period, less $.01 per share (based on data reportedby Bloomberg LP). 25

The stipulation also provided that if at any point during thecalculation period the shares issued to Ironridge droppedbelow any reasonably possible [f]inal [a]mount or if Scripsshares closed below 80 % of the closing price on the tradingday prior to entry of an order on the stipulation, Ironridgewas entitled to request the issuance of additional shares. 26

At the conclusion of the calculation period, if the total valueof the initial issuance and subsequent issuances was lessthan the final amount, Scrips was required to issue furthershares so that the total number of shares issued equaled thefinal amount; conversely, if the number of shares issued toIronridge exceeded the final amount, Ironridge was requiredto return the excess shares to Scrips. 27 The stipulation stated,however, that Scrips was not required to issue at any onetime a number of shares that, aggregated with all other sharesbeneficially owned or controlled by Ironridge or its affiliates,exceeded 9.99 % of the total number of shares of commonstock outstanding. 28 Despite the fact that Kirkland, O'Neil,and Schneiderman allegedly discussed the issue, there is no



provision in the stipulation requiring that Ironridge's sales ofScrips shares not exceed 10% of the daily trading volume onany given day.

On November 8, 2013, the parties filed a joint ex parteapplication in state court for an order approving thestipulation; they argued that ex parte relief was necessarybecause the stipulation addressed the issuance of sharesof [Scrips] stock with a substantially fluctuating marketprice. 29 The application recited that over the course ofthe previous year, the price of Scrips common stock hadfluctuated between $1.05 and $.08, and that it would bedifficult to reach any negotiated resolution that did not requireex parte relief, as the agreement could collapse if Scrips'stock price fluctuated too much. 30 As support for theirrequest that the court approve the stipulation, both partiesfiled declarations stating that they believed the terms ofagreement were fair. 31 The stipulation *1134 recited thatthe agreement was fair to Ironridge and that Scrips' board hadresolved that the terms were fair to and in the best interestsof its shareholders. 32

On November 8, 2013, Superior Court Judge Rolf M. Treuentered an order on the parties' stipulation. 33 Scrips allegesthat thereafter, on several trading days, Ironridge sold anamount of Scrips stock that exceeded ten percent of all saleson that day. 34 Specifically, it contends that Ironridge's salesduring the week of January 6, 2014 represented 28.4 %of total sales; sales during the week of January 21, 2014represented 22.6%; and weekly sales throughout February2014 ranged from 3050%. 35 Scrips maintains that Ironridgemade these sales with the intent and purpose of manipulatingthe market to reduce the price of Scrips' stock so that thenumber of shares to which it was entitled under the parties'agreement would increase. Scrips contends that the sales infact reduced its stock price. 36 It asserts that during the periodof alleged manipulation, Ironridge refused to provide anyinformation concerning its trading activity, claiming it wasconfidential. 37

Based on the decline in Scrips' share price, Ironridgefiled an ex parte application for an order compellingthe issuance of additional shares pursuant to the May 6,2014 stipulation. 38 Scrips opposed the application. 39 Itargued that the court should deny it because Ironridge hadengaged in wrongful conduct in bad faith and hadunclean hands. 40 Specifically, it asserted that Ironridge

had fraudulently manipulated the market for Scrips stock, i.e.,engaged in open market manipulation, by short sellingScrips' shares during the calculation period in an effort todrive the share price down artificially and require Scrips toissue more shares to Ironridge pursuant to the terms of theparties' agreement. 41 Scrips also contended that Ironridge'sconduct was a breach of the parties' agreement, as well as abreach of the covenant of good faith and fair dealing impliedtherein. 42 Finally, it asserted that additional issuance ofshares could be in violation of [federal] securities *1135laws. 43

On May 6, 2014, Judge Treu implicitly rejected each ofScrips' arguments. He entered an order enforcing the orderthat had approved the stipulation (enforcement order), anddirecting that Scrips issue an additional 1,646,008 sharesof common stock to Ironridge pursuant to the adjustmentmechanism set forth in the stipulation. 44 Scrips appealed theorder on May 14, 2014. 45 That appeal is presently pendingbefore the California Court of Appeal, with Scrips' openingbrief due October 15, 2014. 46

On May 22, 2014, eight days after appealing the enforcementorder, Scrips filed this action, alleging claims for breach ofcontract, tortious bad faith, violation of Rule 10b5, anddeclaratory relief. Scrips seeks a declaration that it neednot issue the additional 1,646,008 shares that the SuperiorCourt has ordered it to issue. Scrips maintains that Ironridgeintentionally engaged in post-stipulation trading activity tomanipulate the market and reduce the price of Scrips' stockin order to increase the number of shares it was to receivepursuant to the stipulation's calculation formula. 47 Scripsasserts that Ironridge manipulated its stock to send falseinformation regarding the supply of and demand for Scrips'stock to the market, inducing others to sell Scrips stock andcreating further market distortion. 48 Scrips contends thatabsent illegal manipulation by Ironridge, its stock would betrading at $0.15 per share instead of the current price ofapproximately $0.10. It asserts that Ironridge's manipulativeactions have caused it to issue 10.3 million shares, instead ofthe 8.7 million initially required by the agreement, and thatIronridge is seeking issuance of a further 1.6 million sharesthrough the California courts. 49 As a result, Scrips contends,it has been injured by issuing stock worth more than $1.4million to Ironridge, in satisfaction of a less than $770,000debt. 50



II. DISCUSSION

A. Ironridge's Request for Judicial Notice[1] [2] Ironridge asks that the court take judicial notice

of various documents related to the state court action. 51

Because Rule 12(b)(6) review is confined to the complaint,the court typically does not consider material outside thepleadings (e.g., facts presented in briefs, affidavits, ordiscovery materials) in deciding such a motion. In reAmerican Continental *1136 Corp./Lincoln Sav. & LoanSecurities Litig., 102 F.3d 1524, 1537 (9th Cir.1996). It may,however, properly consider exhibits attached to the complaintand documents whose contents are alleged in the complaintbut not attached, if their authenticity is not questioned. Lee v.City of Los Angeles, 250 F.3d 668, 688 (9th Cir.2001).

[3] [4] In addition, the court can consider matters thatare proper subjects of judicial notice under Rule 201 of theFederal Rules of Evidence. Id. at 68889; Branch v. Tunnell,14 F.3d 449, 454 (9th Cir.1994), overruled on other groundsby Galbraith v. County of Santa Clara, 307 F.3d 1119 (9thCir.2002); Hal Roach Studios, Inc. v. Richard Feiner andCo., Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir.1990); seealso Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ([C]ourtsmust consider the complaint in its entirety, as well as othersources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporatedinto the complaint by reference, and matters of which a courtmay take judicial notice). 52 The court is not required toaccept as true conclusory allegations which are contradictedby documents referred to in the complaint. Steckman v. HartBrewing Inc., 143 F.3d 1293, 1295 (9th Cir.1998).

[5] Ironridge asks that the court take judicial notice of ninedocuments filed in the state court action. 53 These documentsbear directly on whether the court can properly exercisejurisdiction over this case. It is well established that federalcourts may take judicial notice of related state court ordersand proceedings. See Dawson v. Mahoney, 451 F.3d 550, 551(9th Cir.2006) (taking judicial notice of state court orders andproceedings); see also United States v. Black, 482 F.3d 1035,1041 (9th Cir.2007) (stating that an appellate court may takenotice of proceedings in other courts, both within and withoutthe federal judicial system, if those proceedings have a directrelation to matters at issue); Farahani v. Floria, No. 12CV04637LHK, 2013 WL 1703384, *1 n. 1 (N.D.Cal. Apr.

19, 2013) (The remaining documents submitted for judicialnotice are all documents filed in previous and concurrentlawsuits, which are similarly suitable for judicial notice underFed.R.Evid. 201(b)).

The parties' state court stipulation, moreover, which is ExhibitB to Ironridge's request for judicial notice, is attached tothe complaint and therefore need not be judicially noticedto be considered in deciding the motion. See Lee, 250 F.3dat 688 (a court may consider material which is properlysubmitted as part of the complaint on a motion to dismisswithout converting the motion to dismiss into a motionfor summary judgment, quoting Branch, 14 F.3d at 453).Finally, as Ironridge notes, the state court order approving theparties' stipulation, which is Exhibit F to Ironridge's requestfor judicial notice, is referenced in the complaint, and can beconsidered under the incorporation by reference doctrine. SeeUnited States v. Ritchie, 342 F.3d 903, 908 (9th Cir.2003)(acknowledging that a district court may assume that thecontents of a document incorporated by reference are truefor purposes of a motion to dismiss); *1137 In re DowneySec. Litig., No. CV 083261JFW, 2009 WL 2767670, *6 n.4 (C.D.Cal. Aug. 21, 2009) (same).

B. Legal Standard Governing Motions to Dismiss underRule 12(b)(6)A Rule 12(b)(6) motion tests the legal sufficiency of theclaims asserted in the complaint. A Rule 12(b)(6) dismissalis proper only where there is either a lack of a cognizablelegal theory, or the absence of sufficient facts alleged undera cognizable legal theory. Balistreri v. Pacifica Police Dept.,901 F.2d 696, 699 (9th Cir.1988). The court must acceptall factual allegations pleaded in the complaint as true, andconstrue them and draw all reasonable inferences from themin favor of the nonmoving party. Cahill v. Liberty Mut. Ins.Co., 80 F.3d 336, 33738 (9th Cir.1996); Mier v. Owens, 57F.3d 747, 750 (9th Cir.1995).

The court need not, however, accept as true unreasonableinferences or conclusory legal allegations cast in the formof factual allegations. See Bell Atlantic Corp. v. Twombly,550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)(While a complaint attacked by a Rule 12(b)(6) motion todismiss does not need detailed factual allegations, a plaintiff'sobligation to provide the grounds' of his entitle[ment] torelief requires more than labels and conclusions, and aformulaic recitation of the elements of a cause of action willnot do). Thus, a complaint must contain sufficient factualmatter, accepted as true, to state a claim to relief that is



plausible on its face. ... A claim has facial plausibility whenthe plaintiff pleads factual content that allows the court todraw the reasonable inference that the defendant is liable forthe misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678,129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see also Twombly,550 U.S. at 555, 127 S.Ct. 1955 (Factual allegations must beenough to raise a right to relief above the speculative level, onthe assumption that all the allegations in the complaint are true(even if doubtful in fact) (citations omitted)); Moss v. UnitedStates Secret Service, 572 F.3d 962, 969 (9th Cir.2009)([F]or a complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable inferences fromthat content, must be plausibly suggestive of a claim entitlingthe plaintiff to relief, citing Iqbal and Twombly ).

C. Whether the Court Should Dismiss Scrips' ClaimsBased on the RookerFeldman Doctrine

1. Legal Standard Governing Applicationof the RookerFeldman Doctrine

[6] [7] Under the RookerFeldman doctrine, which takesits name from the Supreme Court's decisions in Rooker v.Fidelity Trust Co., 263 U.S. 413, 416, 44 S.Ct. 149, 68 L.Ed.362 (1923), and District of Columbia Court of Appeals v.Feldman, 460 U.S. 462, 476, 103 S.Ct. 1303, 75 L.Ed.2d 206(1983), a federal district court does not have subject matterjurisdiction to hear a direct appeal from a final judgment ofa state court. See Noel v. Hall, 341 F.3d 1148, 1155 (9thCir.2003). A losing party in state court is thus barred fromseeking what in substance would be appellate review of astate judgment in federal district court, even if the partycontends the state judgment violated his or her federal rights.Johnson v. DeGrandy, 512 U.S. 997, 100506, 114 S.Ct.2647, 129 L.Ed.2d 775 (1994); Allah v. Superior Court, 871F.2d 887, 891 (9th Cir.1989) (stating that RookerFeldmandoctrine applies even though the direct challenge is anchoredto alleged deprivations of federally protected due processand equal protection rights), superseded by statute *1138on other grounds as stated in Schroeder v. McDonald, 55F.3d 454, 458 (9th Cir.1995); Worldwide Church of God v.McNair, 805 F.2d 888, 891 (9th Cir.1986) (This doctrineapplies even when the challenge to the state court decisioninvolves federal constitutional issues).

The rationale behind the RookerFeldman doctrine isthreefold. First, the only federal court with the power to hearappeals from state courts is the United States Supreme Court.

Bennett v. Yoshina, 140 F.3d 1218, 1223 (9th Cir.1998).Second, state courts are as competent as federal courts todecide federal constitutional issues. Worldwide Church ofGod, 805 F.2d at 891. Third, any other rule would result in awaste of judicial resources and unnecessary friction betweenstate and federal courts. Id.

[8] [9] When there is parallel state and federal litigation,RookerFeldman is not triggered simply by the entryof judgment in state court. Th [e] [Supreme] Court hasrepeatedly held that the pendency of an action in the statecourt is no bar to proceedings concerning the same matter inthe [f]ederal court having jurisdiction. Exxon Mobil Corp.v. Saudi Basic Indus. Corp., 544 U.S. 280, 292, 125 S.Ct.1517, 161 L.Ed.2d 454 (2005). Proceedings end for RookerFeldman purposes when the state courts finally resolve theissue that the federal court plaintiff seeks to relitigate in afederal forum, even if other issues remain pending at thestate level. Mothershed v. Justices of Supreme Court, 410F.3d 602 (9th Cir.2005) (emphasis added). Thus, where afederal action is filed while the state court action continue[s]in the appeals process in state court, the state proceedingsha[ve] not ended. Nicholson v. Shafe, 558 F.3d 1266, 1278(11th Cir.2009); Guttman v. Khalsa, 446 F.3d 1027, 1032(10th Cir.2006) ( In this case, Guttman filed his federal suitwhile his petition for certiorari to the New Mexico SupremeCourt was pending. His state suit was not final. As such,the RookerFeldman doctrine does not bar his federal suitand the district court does have subject matter jurisdiction tohear the case); Federacion de Maestros de Puerto Rico v.Junta de Relaciones del Trabajo de Puerto Rico, 410 F.3d 17,24 (1st Cir.2005) (Exxon Mobil tells us when a state courtjudgment is sufficiently final for operation of the RookerFeldman doctrine: when the state proceedings [have] ended.If federal litigation is initiated before state proceedings haveended, theneven if the federal plaintiff expects to lose instate court and hopes to win in federal courtthe litigation isparallel, and the RookerFeldman doctrine does not deprivethe court of jurisdiction). 54

*1139 [10] [11] The RookerFeldman doctrine precludesthe exercise of jurisdiction not only over claims that are defacto appeals of a state court decision but also over suitsthat raise issues that are inextricably intertwined with anissue resolved by the state court. See Feldman, 460 U.S.at 483 n. 16, 103 S.Ct. 1303; Noel, 341 F.3d at 1158. Asthe Ninth Circuit has explained: If claims raised in thefederal court action are inextricably intertwined with thestate court's decision such that the adjudication of the federal



claims would undercut the state ruling or require the districtcourt to interpret the application of state laws or proceduralrules, then the federal complaint must be dismissed for lack ofsubject matter jurisdiction. Bianchi v. Rylaarsdam, 334 F.3d895, 898 (9th Cir.2003).

[12] In determining whether a plaintiff's federal claimsare inextricably intertwined with a state court decision, acourt cannot simply compare the issues involved in thestate-court proceeding to those raised in the federal-courtplaintiff. Id. at 900 (quoting Kenmen Engineering v. Cityof Union, 314 F.3d 468, 476 (10th Cir.2002)). Rather, it must pay close attention to the relief sought by the federal-courtplaintiff. Id. As the Ninth Circuit explained in WorldwideChurch of God,

claims are inextricably intertwined if the district courtmust scrutinize not only the challenged rule itself, but thestate court's application of the rule. If, in order to resolvethe claim, the district court would have to go beyond merereview of the state rule as promulgated, to an examinationof the rule as applied by the state court to the particularfactual circumstances of the plaintiff's case, then the courtlacks jurisdiction. Worldwide Church of God, 805 F.2d at892 (quotations and internal alterations omitted).

2. Application of RookerFeldman to the Facts of This Case

[13] [14] Ironridge argues that Scrips' complaint shouldbe dismissed for lack of subject matter jurisdiction because itis a de facto appeal from a final state court judgment and isthus barred by the RookerFeldman doctrine. 55 Specifically,Ironridge contends that Scrips' complaint is a de facto appealof the state court order approving the parties' stipulationbecause it seeks to invalidate the stipulation on the basis thatit was procured by fraud. 56 It asserts that the state courtjudgment is final because the stipulation was unappealable byits terms, 57 and because Scrips *1140 failed to file a noticeof appeal within 60 sixty days of the entry of an order on thestipulation, as required by California law. See CAL. RULESOF COURT 8.104 (time for appeal is sixty days after noticeor 180 days after the entry of judgment). 58

While the complaint contains allegations that Ironridgeexecuted a scheme to defraud that induced Scrips to enterinto the agreement and stipulation, these allegations appear

to form the basis for its Rule 10b5 claim, as opposed toits breach of contract and breach of the implied covenant/tortious bad faith claims. The Rule 10b5 claim does notseek to invalidate the parties' agreement or the state courtorder approving the stipulation that embodied it. Rather, itseeks damages for securities fraud. This is an independentclaim that is not barred by RookerFeldman. See ExxonMobil, 544 U.S. at 293, 125 S.Ct. 1517 (If a federalplaintiff present[s] some independent claim, albeit one thatdenies a legal conclusion that a state court has reached ina case to which he was a party ..., then there is jurisdictionand state law determines whether the defendant prevailsunder principles of preclusion, quoting GASH Assocs. v.Rosemont, 995 F.2d 726, 728 (7th Cir.1993), and citing Noel,341 F.3d at 116364); Great Western Mining & Mineral Co.v. Fox Rothschild LLP, 615 F.3d 159, 173 (3d Cir.2010)(holding, in a case where plaintiff alleged that adversejudgments entered against it in state court were the resultof a conspiracy between defendants and the Pennsylvaniajudiciary, that RookerFeldman did not bar the claim becausewhile Great Western's claim for damages may require reviewof state-court judgments and even a conclusion that they wereerroneous, those judgments would not have to be rejected oroverruled for Great Western to prevail).

Similarly, Scrips' breach of contract and breach of theimplied covenants claims do not seek to invalidate theparties' agreement, or the stipulated order the state courtentered approving the stipulation that embodied it. Rather,they seek damages based on Ironridge's purported breachof the express or implied terms of the agreement andstipulation. 59 Consequently, these claims likewise are notbarred by RookerFeldman.

[15] Scrips' declaratory relief claim, however, is of adifferent character. That claim requests that the court declarethat Scrips has no obligation to meet [Ironridge's] demands[for additional stock] because *1141 Scrips is excusedfrom performing under the terms of the Stipulation dueto Ironridge's illegal conduct, breach of the Stipulation,and tortious bad faith. 60 The claim asserts that Ironridgecontinues to demand the issuance of additional shares inaddition to those that the state court directed be issued in itsenforcement order, now on appeal, 61 and requests that thecourt declare that Scrips has no obligation to comply with thestipulated judgment to the extent it compels Scrips to accedeto these demands. This is equivalent to a request that the courtdeclare the state court order approving the stipulation, andmaking it an enforceable judgment, void. This is precisely



the type of claim that is barred by RookerFeldman. In thisregard, courts distinguish between federal court plaintiffswho seek damages for fraud that led to the entry of a statecourt judgment, and those that seek to invalidate the statecourt judgment itself because it was procured by fraud.Compare Illinois Central Railroad Co. v. Guy, 682 F.3d381, 391 (5th Cir.2012) (RookerFeldman does not bar aclaim that state court plaintiffs' lawyers obtained a settlementjudgment through fraudulent misrepresentations); GreatWestern Mining & Mineral Co., 615 F.3d at 173 (RookerFeldman does not bar a federal plaintiff's damages claimsbased on allegations that defendants conspired to engineer itsloss in state court by exercising improper influence over statejudges); McCormick v. Braverman, 451 F.3d 382, 39293(6th Cir.2006) (RookerFeldman did not deprive the districtcourt of jurisdiction to hear federal plaintiff's claims againsta state court receiver and homeowners' insurer allegingfraud in obtaining a receivership order from state court)with Morris v. American Home Mortg. Servicing, Inc., 443Fed.Appx. 22, 24 (5th Cir.2011) (Unpub.Disp.) (holding thatan otherwise independent unlawful debt collection practicesclaim related to a foreclosure judgment was barred becausethe only relief sought was the setting aside of the stateforeclosure judgment and staying of the execution of thewrit of possession); Turner v. Cade, 354 Fed.Appx. 108,11011 (5th Cir.2009) (Unpub.Disp.) (holding that RookerFeldman barred a claim that a state court divorce decree wasprocured through fraud when the federal plaintiff asked thedecree be declared void); Ford v. U.S. Dep't of TreasuryInternal Revenue Serv., 50 Fed.Appx. 490, 491 (2d Cir.2002)(Unpub.Disp.) (plaintiff's claim seeking invalidation of a statecourt foreclosure judgment on the ground that it was procuredthrough fraud was barred by RookerFeldman ). 62

[16] Scrips disputes this, arguing that it does not seek to havethe court review the state court stipulated judgment, but ratherIronridge's post-settlement abuse of [that] judgment. 63 Itcontends that, to the extent its complaint challenges anyruling of the state court, it is the order *1142 enforcing thestipulated judgment and requiring the issuance of additionalshares. Scrips asserts that decision is not final for purposesof RookerFeldman because it is presently on appeal. 64

See Mothershed, 410 F.3d at 605 n. 1 (Proceedings endfor RookerFeldman purposes when the state courts finallyresolve the issue that the federal court plaintiff seeks torelitigate in a federal forum, even if other issues remainpending at the state level); see also Nicholson, 558 F.3d at1278 (because the Appellants filed the instant federal actionwhile the state court action continued in the appeals process in

state court, the state proceedings had not ended); Guttman,446 F.3d at 1032 (In this case, Guttman filed his federal suitwhile his petition for certiorari to the New Mexico SupremeCourt was pending. His state suit was not final. As such,the RookerFeldman doctrine does not bar his federal suitand the district court does have subject matter jurisdictionto hear the case). The court would agree that, to the extentthe declaratory relief claim seeks a declaration that it hasno obligation to issue an additional 1.6 million shares toIronridge, it attacks a judgment that is not yet final, and isnot barred by the RookerFeldman doctrine for the reasonsenunciated in Exxon Mobil. Exxon Mobil, 544 U.S. at 292,125 S.Ct. 1517. As noted, however, the claim appears to reston demands for additional shares beyond the 1.6 million,and to request that Scrips need not comply with the terms ofthe stipulated judgment at any point in the future. This is abroader attack on the validity of that judgment, which is final,and falls within the scope of the RookerFeldman bar.

For the reasons stated, the court denies Ironridge's motionto dismiss Scrips' Rule 10b5, breach of contract, andbreach of the covenant/tortious bad faith claims under theRookerFeldman doctrine. It also denies Ironridge's requestto dismiss Scrips' declaratory relief claim to the extent itseeks a declaration that it is not obligated to issue 1.6 millionadditional shares of stock to Ironridge as directed by thestate court's enforcement order currently on appeal. It grantsIronridge's motion to the extent Scrips seeks a declaration thatit be excused altogether from performing under the terms ofthe stipulated judgment.

D. Whether the Court Should Abstain from DecidingScrips' Claims under Younger v. Harris

1. Legal Standard Governing Abstention under Younger

[17] [18] Under the doctrine first articulated in Younger v.Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971),federal courts must abstain from hearing cases that wouldinterfere with pending state court proceedings that implicateimportant state interests. Potrero Hills Landfill, Inc. v. Countyof Solano, 657 F.3d 876, 881 (9th Cir.2011) (citing MiddlesexCounty Ethics Comm. v. Garden State Bar Ass'n, 457 U.S.423, 432, 102 S.Ct. 2515, 73 L.Ed.2d 116 (1982)). Thedoctrine is justified by considerations of comity; a properrespect for state functions, a recognition of the fact thatthe entire country is made up of a Union of separate stategovernments, and a continuance of the belief that the National



Government will fare best if the States and their institutionsare left free to perform their separate functions in theirseparate ways. Younger, 401 U.S. at 44, 91 S.Ct. 746.

[19] [20] Absent extraordinary circumstances,abstention in favor of state judicial proceedings is required ifthe state *1143 proceedings (1) are ongoing, (2) implicateimportant state interests, and (3) provide the plaintiff anadequate opportunity to litigate federal claims. Hirsh v.Justices of Supreme Court of California, 67 F.3d 708, 712(9th Cir.1995) (citing Middlesex County Ethics Committee,457 U.S. at 437, 102 S.Ct. 2515). Even then, abstention isappropriate only where the federal action enjoins the statecourt proceedings or has the practical effect of doing so.AmerisourceBergen Corp. v. Roden, 495 F.3d 1143, 1149(9th Cir.2007); Gilbertson v. Albright, 381 F.3d 965, 978(9th Cir.2004) (en banc) (If a state-initiated proceeding isongoing, and if it implicates important state interests ..., andif the federal litigant is not barred from litigating federalconstitutional issues in that proceeding, then a federal courtaction that would enjoin the proceeding, or have the practicaleffect of doing so, would interfere in a way that Youngerdisapproves (emphasis original)).

[21] While the Supreme Court has never directly addressedthe subject, the Ninth Circuit has held that Youngerprinciples apply to actions at law as well as for injunctiveor declaratory relief. Gilbertson, 381 F.3d at 968 (reasoningthat a determination that the federal plaintiff's constitutionalrights have been violated would have the same practical effectas a declaration or injunction on pending state proceedings).If, in a case in which the plaintiff seeks damages, the courtdetermines that the Younger abstention is appropriate, itshould stay the matter until the state court proceedings areconcluded, rather than dismissing the action. Id. at 98182.

2. Application of Younger to the Facts of this Case

[22] [23] [24] Ironridge argues that the court shoulddismiss Scrips' complaint under Younger because this actionis a blatant attempt to interfere with the enforcement ofthe stipulated judgment. 65 It contends that enforcementproceedings are ongoing because they are currently on appealin state court. 66 Scrips concedes that the enforcement order ison appeal to the California Court of Appeal. 67 For Youngerpurposes, the State's trial-and-appeals process is treated as aunitary system, and for a federal court to disrupt its integrity

by intervening in mid-process would demonstrate a lack ofrespect for the State as sovereign. New Orleans Pub. Serv.,Inc. v. Council of City of New Orleans, 491 U.S. 350, 369, 109S.Ct. 2506, 105 L.Ed.2d 298 (1989). Thus, [a] necessaryconcomitant of Younger is that a party [wishing to contest infederal court the judgment of a state judicial tribunal] mustexhaust his state appellate remedies before seeking relief inthe District Court. Id. (quoting Huffman v. Pursue, Ltd.,420 U.S. 592, 608, 95 S.Ct. 1200, 43 L.Ed.2d 482 (1975)).For that reason, the first threshold requirement to Youngerabstentionan ongoing state court proceedingis satisfied.

Ironridge argues that the second threshold requirement ismet as well, because the state court enforcement proceedingimplicates an important state interest, i.e., the state's interestin enforcing the orders and judgments of its courts. SeeSprint Communications, Inc. v. Jacobs, U.S. , 134S.Ct. 584, 588, 187 L.Ed.2d 505 (2013) (citing Pennzoil Co.v. Texaco Inc., 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1(1987)). Scrips counters that this action does not involve thetype of matters that *1144 have traditionally been regardedas vital state interests. 68 It asserts that, because the stipulatedjudgment case was the product of an agreement betweenthe parties, there was no substantial process in the statecourt, and hence any de minimis state interest is outweighedby the federal interest in enforcing securities laws. 69 TheSupreme Court has repeatedly recognized that the Stateshave important interests in administering certain aspects oftheir judicial system. Pennzoil Co., 481 U.S. at 1213, 107S.Ct. 1519; ReadyLink Healthcare, Inc. v. State Comp. Ins.Fund, 754 F.3d 754, 759 (9th Cir.2014) (Younger applieswhen state court proceedings involve a state's interest inenforcing the orders and judgments of its courts); Root v.Schenk, 953 F.Supp. 1115, 1121 (C.D.Cal.1997) (same).

As the Ninth Circuit has cautioned, however, [t]aken out ofcontext, these statements suggest that California's interest inenforcing the judgment in this particular case is of sufficientimportance to meet Younger's second threshold element. SeeAmerisourceBergen, 495 F.3d at 1150 (emphasis original).That court has made it clear that [t]he importance of the[state's] interest is measured by considering its significancebroadly, rather than by focusing on the state's interest in theresolution of an individual case. Id. (quoting Baffert v.Cal. Horse Racing Bd., 332 F.3d 613, 618 (9th Cir.2003));see also Champion Int'l Corp. v. Brown, 731 F.2d 1406,1408 (9th Cir.1984) ([A] challenge[ ] [to] only one ...order, not the whole procedure is not a substantial enoughinterference with [a state's] administrative and judicial



processes to justify abstention). Accordingly, binding[Ninth Circuit] precedent prevents the court from finding thatCalifornia's interest in enforcing this one particular judgmentas opposed to a state's wholesale interest in preserving itsprocedure for posting an appeal bond [see Pennzoil Co., 481U.S. at 1214, 107 S.Ct. 1519], or its interest in retaininga particular contempt of court scheme [see Juidice v. Vail,430 U.S. 327, 330, 335, 97 S.Ct. 1211, 51 L.Ed.2d 376(1977) ],qualifies as sufficiently important to satisfyYounger's second threshold element. Id. For this reason,the court cannot dismiss Scrips' complaint based on Youngerabstention. 70

*1145 E. Whether the Court Should Stay Scrips'Claims under Colorado River Water Conservation Districtv. United States

1. The Colorado River Doctrine

Ironridge next asserts that the action should be dismissed orstayed under Colorado River Water Conservation Districtv. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47L.Ed.2d 483 (1976), which applies in situations involvingthe contemporaneous exercise of concurrent jurisdictions[.] In Colorado River, the Supreme Court was concernedwith the problem posed by the contemporaneous exercise ofconcurrent jurisdiction by state and federal courts. Smithv. Central Ariz. Water Conservation Dist., 418 F.3d 1028,103233 (9th Cir.2005) (citing Gilbertson, 381 F.3d at 982n. 17). In such cases, the Court recognized there may becircumstances in which traditional abstention principles donot apply, yet considerations of wise judicial administration,giving regard to conservation of judicial resources andcomprehensive disposition of litigation, nonetheless justifya decision to stay or dismiss federal proceedings pendingresolution of concurrent state court proceedings. Smith, 418F.3d at 1033 (internal quotation marks and citations omitted).Such circumstances are, however, exceedingly rare. As[the Ninth Circuit] previously observed, the Colorado Riverdoctrine is a narrow exception to the virtually unflaggingobligation of the federal courts to exercise the jurisdictiongiven them. Id.

[25] [26] To decide whether a particular case presents theexceptional circumstances that warrant a Colorado River stayor dismissal, the district court must carefully consider boththe obligation to exercise jurisdiction and the combination offactors counseling against that exercise. R.R. Street & Co.

Inc. v. Transport Ins. Co., 656 F.3d 966, 978 (9th Cir.2011)(quoting Colorado River, 424 U.S. at 818, 96 S.Ct. 1236). TheNinth Circuit has identified eight factors useful in assessingthe propriety of a stay or dismissal under Colorado River.These are: (1) which *1146 court first assumed jurisdictionover any property at stake; (2) the inconvenience of thefederal forum; (3) the desire to avoid piecemeal litigation;(4) the order in which the forums obtained jurisdiction; (5)whether federal law or state law provides the rule of decisionon the merits; (6) whether the state court proceedings canadequately protect the rights of the federal litigants; (7) thedesire to avoid forum shopping; and (8) whether the statecourt proceedings will resolve all issues before the federalcourt. 71 Id. at 97879. The factors relevant to a givencase are subjected to a flexible balancing test, in whichone factor may be accorded substantially more weight thananother depending on the circumstances of the case, andwith the balance heavily weighted in favor of the exerciseof jurisdiction. Holder v. Holder, 305 F.3d 854, 87071(9th Cir.2002) (quoting Moses H. Cone Memorial Hosp. v.Mercury Const. Corp., 460 U.S. 1, 16, 103 S.Ct. 927, 74L.Ed.2d 765 (1983)).

As an initial matter, Ironridge seeks a Colorado River stayonly as to Scrips' breach of contract, breach of impliedcovenant/tortious bad faith, and declaratory relief claims.It acknowledges that the state court has no concurrentjurisdiction to hear Scrips' Rule 10b5 claim, and thus doesnot seek to have the court should stay that claim. See IntelCorp. v. Advanced Micro Devices, Inc., 12 F.3d 908, 913 n.7 (9th Cir.1993) (the circuit courts, and the Ninth Circuit inparticular, have uniformly held that a district court may notgrant a stay in [cases involving claims subject to exclusivefederal jurisdiction]); Minucci v. Agrama, 868 F.2d 1113,1115 (9th Cir.1989) ( the Colorado River doctrine onlyapplies to claims under the concurrent jurisdiction of thefederal and state courts); Silberkleit v. Kantrowitz, 713F.2d 433, 436 (9th Cir.1983) (the district court has nodiscretion to stay proceedings as to claims within exclusivefederal jurisdiction under the wise judicial administrationexception); Krieger v. Atheros Communications, Inc., 776F.Supp.2d 1053, 1058 (N.D.Cal.2011) (holding ColoradoRiver did not apply to claims under the Securities ExchangeAct because such claims fall within the exclusive jurisdictionof federal courts).

The Ninth Circuit has not addressed the propriety of issuinga partial Colorado River stay. District courts in the NinthCircuit have repeatedly found partial stays permissible,



however, where some, but not all, of a federal plaintiff'sclaims are pending in a parallel state action. Krieger, 776F.Supp.2d at 106061 (staying plaintiff's state law classaction claims while permitting federal securities law claimsto proceed); see also Taylor v. AlliedBarton Sec. Servs.LP, No. 13CV01613AWI, 2014 WL 1329415, *5 n. 6(E.D.Cal. Apr. 1, 2014) (observing that [c]ourts in the NinthCircuit have [ ] held that a partial stay of proceedings isauthorized under the Colorado River doctrine, and stayingstate law claims while permitting a Fair Labor StandardsAct claim to proceed); SperberPorter v. Kell, No. CV0801424PHXGMS, 2009 WL 1600689, *5 (D.Ariz. June 8,2009) (Finally, Plaintiffs do not disagree that the Court'sstay of the declaratory judgment claim was proper. Plaintiffsconfine their motion to arguing that the Court should not havestayed the breach of contract claim, and Plaintiffs have neverdisputed that their declaratory judgment claim regarding themeaning of paragraph fifteen of the settlement agreementis identical to *1147 the issue before (and now decidedby) the state court. Thus, there is no dispute that at leasta partial stay was proper); In re Countrywide Fin. Corp.Derivative Litig., 542 F.Supp.2d 1160, 1172 (C.D.Cal.2008)(concluding that a partial stay of state law claims raisedin both state and federal proceedings are under ColoradoRiver was permissible, and permitting a federal securities lawclaim to go forward); Daugherty v. Oppenheimer & Co., No.CV 067725 PJH, 2007 WL 1994187, *6 (N.D.Cal. July 5,2007) (In addition, contrary to the argument advanced byplaintiff, the court finds that Colorado River applies evenwhere a state court action will not resolve all the claims inthe federal action. Neither Holder nor Intel supports plaintiff'sargument that the Colorado River doctrine may not be usedto dismiss or stay only part of an action. Holder and Intelsimply stand for the proposition that a Colorado River motionmay not be granted where a defendant seeks to stay claims inthe federal court action that are unrelated to the state courtclaims. Here, by contrast, Oppenheimer does not seek to stayor dismiss the nationwide collective action claims that willnot be resolved by the Handler action). 72 Based on thereasoning of these cases, and the purpose of the ColoradoRiver doctrine generally, the court concludes that, consistentwith Ironridge's motion, it may stay Scrips' breach of contract,breach of implied covenant/tortious bad faith, and declaratoryrelief claims under Colorado River, while permitting Scrips'Rule 10b5 claim to proceed.

2. Whether a Stay Under ColoradoRiver Would Be Appropriate

[27] [28] The threshold question in deciding whetherColorado River abstention is appropriate is whether thereare parallel federal and state suits. Chase Brexton HealthServices, Inc. v. Maryland, 411 F.3d 457, 463 (4th Cir.2005).In the Ninth Circuit, exact parallelism [between the twosuits] ... is not required. It is enough if the two proceedingsare substantially similar. Nakash v. Marciano, 882 F.2d1411, 1416 (9th Cir.1989); see also County of Marin v.Deloitte Consulting LLP, No. C 1100381 SI, 2011 WL3903222, *1 (N.D.Cal. Sept. 6, 2011) (The threshold forapplying the Colorado River doctrine is whether the twocases are substantially similar. Substantial similarity doesnot mean that the cases must be identical). This inquiryexamines whether the suits involve the same parties and thesame claims. See Nakash, 882 F.2d at 1416 (The presentparties are all named in the California suit); see also IllinoisSchool Dist. Agency v. Pacific Ins. Co., Ltd., 471 F.3d714, 718 (7th Cir.2006) (The court also rejected Pacific'sargument that the district court should abstain *1148 under[Colorado River ] because the proceedings were not paralleland because they were between different parties involvingdifferent contracts); Lumen Const., Inc. v. Brant Const. Co.,Inc., 780 F.2d 691, 695 (7th Cir.1985) (in deciding whethercases are parallel, a court should look for a substantiallikelihood that the state litigation will dispose of all claimspresented in the federal case); Crawley v. Hamilton CountyCommissioners, 744 F.2d 28, 31 (6th Cir.1984) (holdingthat the state proceeding were not parallel because differentdefendants were named and the federal complaint includedmore allegations); Innovation Ventures, LLC v. UltimateLifestyles, LLC, No. 4:08CV232, 2009 WL 1490589, *3(E.D.Tex. May 27, 2009) (The Court has weighed theColorado River factors here and finds that abstention isnot appropriate at this time. Primarily, this case and theDallas state court case involve different parties); Becker v.Granholm, 272 F.Supp.2d 643, 645 (E.D.Mich.2003) ([T]heColorado River abstention doctrine is inapplicable becausethe requirement of a parallel state proceeding is lackingwhere, as here, the state and federal lawsuits involve differentparties). The inquiry also asks whether the disputes involve,in a more general sense, the same facts. See Nakash, 882 F.2dat 1416 (All of these disputes concern how the respectiveparties have conducted themselves since Nakash purchased aportion of Guess).



[29] [30] In determining whether two suits aresubstantially similar, if the district court has a substantialdoubt as to whether the state proceedings will resolvethe federal action [the doubt] precludes the granting of a[Colorado River ] stay. Intel Corp. v. Advanced MicroDevices, Inc., 12 F.3d 908, 913 (9th Cir.1993). As theSupreme Court has noted,

[w]hen a district court decides to dismiss or stay underColorado River, it presumably concludes that the parallelstate-court litigation will be an adequate vehicle for thecomplete and prompt resolution of the issues betweenthe parties. If there is any substantial doubt as to this, itwould be a serious abuse of discretion to grant the stayor dismissal at all. Thus, the decision to invoke ColoradoRiver necessarily contemplates that the federal court willhave nothing further to do in resolving any substantive partof the case, whether it stays or dismisses. Moses H. ConeMemorial Hospital v. Mercury Construction Corp., 460U.S. 1, 28, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

For this reason, [a] district court may enter a Colorado Riverstay order only if it has full confidence that the parallelstate proceeding will end the litigation. Intel, 12 F.3d at 913(citing Gulfstream Aerospace Corp. v. Mayacamas Corp.,485 U.S. 271,

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