(BK) Svenhard's Swedish Bakery v. United States Bakery

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF OREGON

SVENHARD’S SWEDISH BAKERY, Case No. 3:20-cv-1454-SI

Plaintiff, OPINION AND ORDER

v.

UNITED STATES BAKERY; MOUNTAIN

STATES BAKERIES LLC; CENTRAL

CALIFORNIA BAKING COMPANY;

MURREY R. ALBERS; MICHAEL

PETITT; and KENNETH HALL,

Defendants.

Solomon B. Cera and Thomas C. Bright, CERA LLP, 595 Market Street, Suite 1350, San

Francisco, CA 94105; Joshua L. Ross and Sophia C. von Bergen, STOLL STOLL BERNE

LOKTING & SHLACHTER PC, 209 SW Oak Street, Suite 500, Portland, OR 97204. Of Attorneys

for Svenhard’s Swedish Bakery.

Steven M. Wilker and Zachary W.L. Wright, TONKON TORP LLP, 888 SW Fifth Avenue,

Suite 1600, Portland, OR 97204. Of Attorneys for United States Bakery, Mountain States

Bakeries LLC, Central California Baking Company, Murrey R. Albers, Michael Petitt, and

Kenneth Hall.

Michael H. Simon, District Judge.

Svenhard’s Swedish Bakery (Svenhard’s) filed for Chapter 11 bankruptcy in the Eastern

District of California. In re Svenhard’s Swedish Bakery, Case No. 19-15277-C-11 (Bankr. E.D.

Cal.). Afterward, Svenhard’s commenced this adversary proceeding against three business

entities and three individuals (collectively, Defendants). Defendants successfully moved to

withdraw the bankruptcy reference and transfer venue to the District of Oregon. After the case

arrived in this district, Svenhard’s filed a First Amended Complaint (FAC), asserting eight

claims for relief: (1) successor liability; (2) lender liability; (3) breach of fiduciary duty;

(4) aiding and abetting breach of fiduciary duty; (5) fraud; (6) conversion; (7) rescission; and

(8) violation of California Business & Professions Code § 17200. ECF 26 (FAC). Defendants

moved to dismiss all eight claims. ECF 27. For the reasons that follow, the Court grants

Defendants’ motion to dismiss with leave to replead.1

STANDARDS

A motion to dismiss for failure to state a claim may be granted only when there is no

cognizable legal theory to support the claim or when the complaint lacks sufficient factual

allegations to state a facially plausible claim for relief. Shroyer v. New Cingular Wireless Servs.,

Inc., 622 F.3d 1035, 1041 (9th Cir. 2010). In evaluating the sufficiency of a complaint’s factual

allegations, a federal court must accept as true all well-pleaded material facts alleged in the

complaint and construe them in the light most favorable to the non-moving party. Wilson v.

Hewlett-Packard Co., 668 F.3d 1136, 1140 (9th Cir. 2012); Daniels-Hall v. Nat’l Educ. Ass’n,

629 F.3d 992, 998 (9th Cir. 2010). To be entitled to a presumption of truth, allegations in a

complaint “may not simply recite the elements of a cause of action but must contain sufficient

allegations of underlying facts to give fair notice and to enable the opposing party to defend itself

effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). The court must draw all

1 This Court also has pending two cases related to this action: Board of Trustees of the

Bakery & Confectionery Union & Industry International Pension Fund v. United States Bakery,

Case No. 3:21-cv-617-SI, and Kerry Kurisu v. United States Bakery Supplemental Key

Management Retirement Plan, Case No. 3:21-cv-912-SI. The parties have stipulated to

coordinate all three cases for discovery purposes. ECF 58.

reasonable inferences from the factual allegations in favor of the plaintiff. Newcal Indus. v. Ikon

Office Sol., 513 F.3d 1038, 1043 n.2 (9th Cir. 2008). The court need not, however, credit a

plaintiff’s legal conclusions that are couched as factual allegations. Ashcroft v. Iqbal, 556

U.S. 662, 678-79 (2009).

A complaint must contain sufficient factual allegations to “plausibly suggest an

entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the

expense of discovery and continued litigation.” Starr, 652 F.3d at 1216. “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.” Iqbal, 556 U.S. at 678 (citing

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)). “The plausibility standard is not akin to a

probability requirement, but it asks for more than a sheer possibility that a defendant has acted

unlawfully.” Mashiri v. Epsten Grinnell & Howell, 845 F.3d 984, 988 (9th Cir. 2017) (quotation

marks omitted).

BACKGROUND

Svenhard’s was incorporated in California in 1959 and produced and sold specialty baked

goods, including breakfast pastries and similar items. Since its founding, Svenhard’s owned and

operated a bakery plant in Oakland, California. In late 2013 and early 2014, Svenhard’s was no

longer profitable and needed capital to modernize its plant and pay debts in arrears. Among other

debts, Svenhard’s was in default with its secured bank lender, Bay Commercial Bank (BCB).

Defendant United States Bakery (US Bakery) is an Oregon corporation that produces and

sells baked goods, mainly in the Pacific Northwest. US Bakery operates under the name “Franz,”

among other names. US Bakery also owns several regional brands of bread and cookie products

and other bakeries. Since 1994, US Bakery had been a distributor of Svenhard’s. Defendants

Mountain States Bakeries LLC (Mountain) and Central California Baking Company (CCBC) are

wholly owned subsidiaries of US Bakery. Defendant Murrey Robert Albers (Albers) is the Chief

Executive Officer (CEO) of US Bakery. Defendant Michael Petitt (Petitt) is the Chief Financial

Officer (CFO) of US Bakery. Defendant Kenneth Hall (Hall) is an employee of US Bakery.

In April 2014, Svenhard’s and US Bakery signed a document titled, “Transaction

Background and Summary of Terms” (Term Sheet). ECF 27-1 at 1-3. This nonbinding Term

Sheet described the significant events that the parties anticipated: US Bakery would purchase a

facility in Exeter, California and lease that facility to Svenhard’s so that Svenhard’s could move

its operations from Oakland to Exeter; US Bakery would purchase Svenhard’s “brand” by

acquiring its recipes and trademarks for an advance payment of $500,000 and an extra payment

based on the results of a third-party appraisal; US Bakery would license back to Svenhard’s the

intellectual property that US Bakery had acquired so that Svenhard’s could continue its

operations; US Bakery would become an exclusive distributor of Svenhard’s products

manufactured at Oakland or Exeter; and at the end of the five-year term of the anticipated

implementing agreements, US Bakery would pay a supplemental payment for its purchase of

Svenhard’s intellectual property based on a formula using Svenhard’s earnings during that

period.

The parties also contemplated that a subsidiary of US Bakery would be the party doing

the distribution of products made by Svenhard’s and that Svenhard’s might have some

representation on the board of directors of that subsidiary. No provision in the nonbinding Term

Sheet called for US Bakery to assume any of Svenhard’s liabilities. Instead, the anticipated

transactions were structured as an “asset sale and leaseback” with a five-year “earn-out” period

during which Svenhard’s could enhance the ultimate purchase price that it received.

Also in April 2014, Svenhard’s and US Bakery signed a Recipes and Transfer Processes

Transfer Agreement; Distribution Rights (Bridge Agreement or Recipes Transfer Agreement),

under which US Bakery purchased certain intellectual property (namely, recipes and other

“know how”) (ECF 27-1 at 7-8). That same month, Svenhard’s and Mountain signed an

Intellectual Property Rights Purchase Agreement (IP Purchase Agreement), under which

Mountain acquired Svenhard’s trademarks, recipes, and other related intellectual property

(ECF 27-1 at 9-16).

In August 2014, Svenhard’s and US Bakery signed a Distribution Agreement, under

which US Bakery would distribute Svenhard’s products for five years (ECF 27-1 at 4-6). Also in

August 2014, Svenhard’s and Mountain signed both a License Agreement, under which

Mountain would license back to Svenhard’s certain intellectual property to be used in Svenhard’s

ongoing operations for a term of five years (ECF 27-1 at 17-23), and a Contingent Supplemental

Payment Agreement (Contingent Payment Agreement), under which Mountain would pay

Svenhard’s a supplemental payment based on Svenhard’s results of operations during the next

five years at the end of the license term (ECF 27-1 at 24-25). Svenhard’s, US Bakery, and

Mountain also signed in August 2014 a Closing Agreement, referencing these agreements (as

well as an Option Agreement), characterizing all agreements as “an integral part of related

transactions” subject to cross-defaults, summarizing the results of the third-party trademark

appraisal, and agreeing to a purchase price for all acquired assets (ECF 27-1 at 26-28).

In summary, as of August 2014, Svenhard’s sold certain assets to US Bakery or

Mountain, and Svenhard’s took back certain licenses that allowed it to continue to operate its

business so that in 2019, at the end of the five-year license period, Svenhard’s could earn a

supplemental payment greater than the base payments that US Bakery and Mountain first paid to

acquire Svenhard’s assets. US Bakery also both made loans to Svenhard’s and guaranteed new

loans from others to Svenhard’s so that Svenhard’s could revive its faltering operations and

hopefully earn a supplemental payment at the end of the license period.2

Svenhard’s alleges that between 2014 and 2019, Defendants caused Svenhard’s business

to continue to suffer. In November 2019, Defendants engaged in self-help repossession of the

collateral for Svenhard’s unpaid debts and filed a notice of UCC foreclosure sale, resulting in

US Bakery and its affiliates fully assuming Svenhard’s operations. On December 19, 2019,

Svenhard’s filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the

Eastern District of California. Svenhard’s contends that Defendants’ conduct drove Svenhard’s

into bankruptcy and deprived the company’s creditors of millions of dollars owed to them.

Svenhard’s also contends that US Bakery obtained Svenhard’s assets for inadequate

consideration. Svenhard’s further alleges that US Bakery, through its CEO Albers, insisted on

negotiating key agreements not with David Kunkel, Svenhard’s Chief Operating Officer (COO)

since 2008, who had deep knowledge of Svenhard’s business and personally knew the

US Bakery personnel, but with Michelle Barnett (Barnett), now deceased, who was then

President of Svenhard’s and the niece of Svenhard’s founder, Ronny Svenhard. According to

Svenhard’s, Barnett lacked Kunkel’s longstanding involvement in the business.

Svenhard’s also contends that the purchase price paid by US Bakery was left in the

control of Defendants because it was largely based on an appraisal performed by a US Bakery-

selected third-party appraiser. Svenhard’s further alleges that Defendants had no intention of

2 In February 2016, Svenhard’s, US Bakery, and Mountain signed an Amended and

Restated Loan Agreement (ECF 27-1 at 39-47). In July 2017, Svenhard’s and US Bakery

signed a Guaranty Reimbursement Agreement (ECF 27-1 at 29-33) and a Security

Agreement (ECF 27-1 at 33-38).

allowing Svenhard’s to generate any significant earnings during the five-year earning period.

This allowed Defendants to acquire Svenhard’s valuable intellectual property and recipes, while

paying only a minimal amount for those assets. Svenhard’s adds that, by the time these

transactions were concluded, Svenhard’s received only $3.5 million for its business, despite

being led to believe by US Barkey’s CEO, Albers, that the ultimate consideration would be in the

range of $15 million.

CHOICE OF LAW

The parties agree, at least for purposes of the pending motion, that Oregon law governs

Svenhard’s first, third, fourth, and fifth claims, which allege successor liability, breach of

fiduciary duty, aiding and abetting a breach of fiduciary duty, and fraud. The parties do not

agree, however, on which law governs Svenhard’s second, sixth, seventh, and eighth claims,

which allege lender liability, conversion, rescission, and violation of California’s Business and

Professions Code § 17200. Svenhard’s contends that for these latter claims, California law

governs, while Defendants argue that Oregon law applies. For the reasons that follow, the Court

concludes that Oregon law applies to all claims asserted by Svenhard’s in this lawsuit.

The Court begins its choice of law analysis by noting that Svenhard’s originally filed this

lawsuit in federal court in California and that none of Svenhard’s claims rely on federal law for

the rule of decision. Although a district court applying state law will usually employ the choice

of law rules of the forum state in the place of initial filing, that is not the case when a plaintiff

has breached an agreement to bring suit in another forum. In its unanimous decision in Atlantic

Marine Construction Co. v. U.S. District Court, 571 U.S. 49 (2013), the Supreme Court

addressed the appropriate choice of law analysis when venue for a case is transferred to a district

court in another state to enforce the parties’ agreed-upon choice of forum. Id. at 64-65. The

Supreme Court explained: “When a party bound by a forum-selection clause flouts its

contractual obligation and files suit in a different forum, a § 1404(a) transfer of venue will not

carry with it the original venue’s choice-of-law rules” but will apply the rule from Klaxon Co. v.

Stentor Electric Manufacturing Co., 313 U.S. 487, 496 (1941), that requires a district court to

apply the choice of law rules of the state in which it sits. Atlantic Marine, 571 U.S. at 65.

Svenhard’s expressly agreed to Portland, Oregon as the exclusive forum for all litigation arising

from or relating to the agreements or transactions at issue.

The IP Purchase Agreement states: “This Agreement will be governed by and construed

in accordance with the internal law of the State of Oregon without giving effect to any choice- or

conflict-of-law provision or rule.” ECF 27-1 at 16 (¶ 9.8). It also provides: “Any dispute arising

out of or based upon this Agreement or the Transactions must be instituted in the state and

federal courts located in Portland, Oregon, and each party irrevocably submits to the exclusive

jurisdiction of such courts.” Id. ¶ 9.9. Similarly, the Distribution Agreement provides: “The

Agreement is governed exclusively by Oregon law, excluding conflict-of-law principles.”

ECF 27-1 at 5 (¶ 11). The License Agreement also states that it “will be interpreted and

construed in accordance with the provisions of the Federal Trademark Act of 1946, as

amended 15 U.S.C. § 1051 et seq. and the laws of the State of Oregon, regardless of its choice of

law provisions,” and it also provides for the exclusive jurisdiction in the federal and state courts

in Portland, Oregon. ECF 27-1 at 21 (¶¶ 10.7 and 10.8).

In addition, the Amended and Restated Loan Agreement, signed in 2016, states: “This

Agreement will be interpreted and construed in accordance with the laws of the State of Oregon,

regardless of its choice of law provisions,” and it too provides for exclusive jurisdiction in the

federal and state courts in Portland, Oregon. ECF 27-1 at 45 (¶¶ 8.7 and 8.8). The Guaranty

Agreement, signed in 2017 also provides that it “will be governed by and construed according to

the laws of the State of Oregon, without reference to any conflict-of-laws principles” and that the

state and federal courts in Portland, Oregon will have exclusive jurisdiction over “[a]ll disputes

arising out of or relating to this Agreement.” ECF 27-1 at 31 (¶ 11). The Security Agreement,

also signed in 2017, provides similarly. ECF 27-1 at 36 (¶ 149).3

In 2001, Oregon codified its choice of law rules in Chapter 15 of the Oregon Revised

Statutes (ORS). Oregon law provides, in relevant part: “the contractual rights and duties of the

parties are governed by the law or laws that the parties have chosen.” ORS § 15.350(1)

(emphasis added). This rule appears under the heading “Choice of Law for Contracts.” Under the

heading “Choice of Law for Torts and Other Noncontractual Claims,” Oregon law looks

generally to what conduct caused the injury and where the conduct occurred. ORS § 15.415.

Further, “[i]f injurious conduct occurs in more than one state, the state where the conduct

occurred that is primarily responsible for the injury is the state where the injurious conduct

occurred.” ORS § 15.415(1).

In their agreements, the parties agreed to use Oregon substantive law to interpret and

construe the relevant contracts. Svenhard’s, however, did not assert any direct claims for breach

of contract (whether based on express or implied terms). Instead, as noted, Svenhard’s alleged

only claims of successor liability, lender liability, breach of fiduciary duty, fraud, conversion,

rescission, and violation of a California law governing unfair competition. The Court considers it

significant, however, that all claims asserted by Svenhard’s depend on the formation, existence,

and construction of the parties’ several interrelated agreements, and the primary relief that

Svenhard’s seeks is rescission of those agreements and return to the status quo ante.

3 The other agreements do not contain either a choice of law provision or a forum

selection clause.

Oregon’s statutory choice of law rules do not seem to address this situation. In Portfolio

Recovery Associates, LLC v. Sanders, 366 Or. 355 (2020), the Oregon Supreme Court explained

that when there is a choice-of-law scenario that the statutes do not explicitly resolve, it may be

appropriate to look to common law conflicts principles to :fill that gap.” Id. at 374. The most

relevant principle of the common law states:

The law of the state chosen by the parties to govern their

contractual rights and duties will be applied if the particular issue

is one which the parties could have resolved by an explicit

provision in their agreement directed to that issue.

Restatement (Second) of Conflict of Law § 187(1) (1971). Thus, because Svenhard’s seeks

largely to rescind its various contractual obligations and the parties could have resolved this

choice of law dispute by an explicit provision directed to that issue, the Court will apply the

substantive law expressly chosen by the parties to govern their contractual rights and duties, the

law of Oregon.

DISCUSSION

A. Plaintiff’s First Claim: Successor Liability

Under Oregon law, “[t]he general rule is that where one corporation sells or otherwise

transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities

of the transferor.” Gonzalez v. Standard Tools & Equip. Co., 270 Or. App. 394, 397 (Or. App.

2015) (quoting Erickson v. Grande Ronde Lumber Co., 162 Or. 556, 568 (Or. 1939)). But

there are four well recognized exceptions, under which the

purchasing corporation becomes liable for the debts and liabilities

of the selling corporation: (1) where the purchaser expressly or

impliedly agrees to assume such debts; (2) where the transaction

amounts to a consolidation or merger of the corporations;

(3) where the purchasing corporation is merely a continuation of

the selling corporation; and (4) where the transaction is entered

into fraudulently in order to escape liability for such debts.

Gonzalez, 270 Or. App. at 397. Svenhard’s argues that the first three exceptions apply. ECF 31

at 23.

The first exception requires that the purchaser expressly or impliedly agreed to assume

the seller’s (here, Svenhard’s) debts. Svenhard’s identifies negotiations that occurred in

September 2019 about the official takeover of Svehard’s operations by US Bakery. Svenhard’s

alleges that during a meeting on September 4, 2019, US Bakery’s CEO, Albers, told Svenhard’s

CEO, Ronny Svenhard, that US Bakery “would pay all of Svenhard’s liabilities.” FAC ¶ 69.

Albers “specifically said [US Bakery] would ‘pay all suppliers’ of Svenhard’s (meaning all trade

accounts payable), arrearages on health insurance payment delinquencies under Svenhard’s

collective bargaining agreements with the Teamster’s union, and for the health insurance of

Svenhard’s production workforce in Exeter and for certain former DSD sales representatives.”

Id. Svenhard’s further alleges that shortly after this meeting, US Bakery’s attorneys prepared a

form of release agreement under which Svenhard’s would release all claims against US Bakery

and Mountain, but Svenhard’s refused to sign that release. Id. ¶ 72. On October 23, 2019,

US Bakery’s attorney told Svenhard’s attorney that US Bakery would not be assuming

Svenhard’s debts. Id. ¶ 74.

Accepting Svenhard’s factual allegations as true, the first exception has not been

sufficiently stated. From the context, in the Fall of 2019, the parties may have been negotiating a

deal under which US Bakery would assume Svenhard’s liabilities in exchange for a release of

claims against US Bakery and Mountain. But such a release was never given, and such an

agreement does not appear to have been reached. Further, even if Svenhard’s were to contend

that US Bakery made this promise unconditionally, that still would be insufficient for at least two

reasons. First, such a promise would not appear to be supported by either consideration or

reasonable detrimental reliance, and neither is alleged in the FAC. Second, and more

significantly, the alleged promise by US Bakery occurred five years after the 2014 asset purchase

transaction at issue. The relevant question for purposes of the first exception is whether, as part

of the asset purchase transaction in 2014, US Bakery expressly or impliedly agreed to assume the

liabilities of Svenhard’s. Svenhard’s has not alleged any such agreement in 2014.

The second exception requires a transaction that “amounts to” a consolidation or merger

of the two corporations (here, Svenhard’s and US Bakery). In other words, was there a de facto

merger? Not only has Svenhard’s failed to allege facts showing that the transaction “amounted

to” a consolidation or merger, or a de facto merger, the allegations, including the transaction

documents referenced in the FAC, show precisely the opposite. The documents refer to the

purchase of assets, including intellectual property. Also, both companies remained legally

separate entities. See Tyree Oil, Inc. v. Bureau of Lab. & Indus., 168 Or. App. 278, 283 (2000)

(holding that a transaction did not amount to a consolidation or merger after a purchase of assets

when two companies continue to exist as separate entities and have completely different

ownership and management). Svenhard’s also alleges that US Bakery later exercised “control”

over the operations of Svenhard’s, which Defendants deny, but even that does not, by itself,

show a de facto consolidation or merger of the two corporations. In short, Svenhard’s has failed

to allege a de facto merger.

The third exception is when the purchasing corporation is a “mere continuation” of the

selling corporation. Svenhard’s argues that this scenario presents its strongest case for successor

liability. The Oregon Supreme Court applied the “mere continuation” exception in Portland

Section of Council of Jewish Women v. Sisters of Charity of Providence in Oregon, 266 Or. 448

(1973). In that case, the Oregon Supreme Court found a “mere continuation” when:

The evidence indicates that the reason for the reincorporation was

a technical limitation on the amount of assets which could be held

by the old corporation. After the reincorporation, defendant took

over the operation of the hospital and all assets connected

therewith including whatever remained of plaintiff’s $5,000 or

whatever assets were purchased with it. Since the reincorporation

was only a technical matter and was for the purpose of

uninterruptedly carrying on the business of the old corporation, and

since defendant took over all of its predecessor’s assets and

continued to honor the agreement, defendant is liable on the

contract to the same extent as was its predecessor.

Id. at 453. The facts alleged in the pending lawsuit are not even remotely similar.

Svenhard’s also invites the Court to consider, even if only for persuasive or explanatory

purposes, the decision from the California Supreme Court in Ray v. Alad Corp., 19 Cal. 3d 22

(1977). In that case, the California Supreme Court stated:

California decisions holding that a corporation acquiring the assets

of another corporation is the latter’s mere continuation and

therefore liable for its debts have imposed such liability only upon

a showing of one or both of the following factual elements: (1) no

adequate consideration was given for the predecessor corporation’s

assets and made available for meeting the claims of its unsecured

creditors; (2) one or more persons were officers, directors, or

stockholders of both corporations.

Id. at 29. It is unclear what the Ray court meant by “no adequate consideration.” It cannot mean,

however, that a simple allegation of inadequate consideration, by itself, is enough to state a claim

for successor liability under the “mere continuation” exception. If it did, then every unpaid

creditor could, in theory, state a claim of successor liability against an asset purchaser merely by

alleging inadequate consideration.

Svenhard’s argues that it has sufficiently alleged both prongs: inadequate consideration

and at least one officer, director, or stockholder in common. First, Svenhard’s alleges that

US Bakery paid “grossly inadequate consideration” for Svenhard’s assets. FAC ¶¶ 18, 93.

Second, Svenhard’s alleges that US Bakery’s CEO, Albers, was a Svenhard’s “advisory board

member.”4 FAC ¶ 39. Thus, according to Svenhard’s, it has sufficiently alleged successor

liability under a theory of “mere continuation” by alleging both that US Bakery bought

Svenhard’s assets for allegedly “grossly inadequate consideration” and that at least one person

(US Bakery’s CEO, Albers) was an officer, director, or stockholder of both corporations.

Defendants respond that the allegation of inadequate consideration is merely conclusory

as well as implausible. If by “inadequate consideration,” Svenhard’s merely means that it was in

an economically difficult situation in 2014 and US Bakery, through hard bargaining, received a

very good deal, that is not implausible. The real rub with Svenhard’s “mere continuation” theory,

in the Court’s view, lies with the second prong.

According to one learned treatise: “The ‘mere continuation’ of business exception

reinforces the policy of protecting the rights of a creditor by allowing it to recover from the

successor corporation whenever the successor is substantially the same as the predecessor.” 15

William Meade Fletcher, et al., FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS

§ 7124.10, at 301 (perm. ed., rev. vol. 1999). US Bakery is not substantially the same as

Svenhard’s.

Further, as noted by another scholar: “The de facto merger and ‘mere continuation’ bases

do not differ significantly in their scope from each other.” Marie T. Reilly, Making Sense of

Successor Liability, 31 HOFSTRA L. REV. 745, 747 n.7 (2003). Professor Reilly explains that “[a]t

least one court has tried to differentiate between the bases.” Id. (citing Nat’l Gypsum Co. v.

Cont’l. Brands Corp., 895 F. Supp. 328, 336 (D. Mass. 1995)) (noting that de facto merger

4 Svenhard’s also refers to Albers as a “former director of Svenhard’s.” FAC ¶ 7. Nothing

else in the FAC, however, shows that Albers, besides being the CEO of US Bakery, was an

actual “director” of Svenhard’s in the legal sense of that word. At least without further pleading,

the Court construes Svenhard’s allegation to be merely that Albers merely held himself out to be

an “advisory board member” of Svenhard’s.

applies to situations where the ownership, control, and assets of one entity are combined with a

preexisting entity; “mere continuation” applies when the selling corporation sets up a purchaser

with the specific purpose of continuing the same business but with a new form (emphases in

original)). Professor Reilly concludes that all three bases of successor liability (de facto merger,

“mere continuation,” and fraud) “serve the same purpose as fraudulent transfer law—protecting

the transferor’s creditors from the effect of a transfer that defrauds them.” Id., at 749.

Viewed in this light, Svenhard’s has failed to state a claim under the “mere continuation”

exception. Svenhard’s, as the selling corporation, did not set up a purchaser (US Bakery or

Mountain). And Svenhard’s did not do that with the specific purpose of continuing the same

business but with a new form to defraud Svenhard’s creditors. Thus, even if Albers, as the CEO

of the purchasing entity, the transferee, would have taken an actual board seat on Svenhard’s,

that is not the sort of commonality that the “mere continuation” exception requires. The essence

of fraudulent activity in the context of the “mere continuation” exception is when an owner,

stockholder, director, or officer of the transferor (here, Svenhard’s) participates in causing the

transferor’s assets to be sold below fair value to a transferee for the purpose of defrauding the

transferor’s creditors and benefitting that owner, stockholder, director, or officer, who is now

part of an entity that has acquired valuable assets without paying fair value. Moreover,

Svenhard’s does not allege that Albers was on the board of Svenhard’s (either actually or in an

advisory capacity) when the original deal was struck.

Finally, Svenhard’s asks the Court to consider the California appellate decision in

Cleveland v. Johnson, 209 Cal. App. 4th 1315 (2012). In that case, the California Court of

Appeals explained:

[N]o single factual element, standing alone, would establish or

negate successor liability. . . . The significant principle is that “if a

corporation organizes another corporation with practically the

same shareholders and directors, transfers all the assets but does

not pay all the first corporation’s debts, and continues to carry on

the same business, the separate entities may be disregarded and the

new corporation held liable for the obligations of the old.”

Id. at 1334 (citation omitted). As Svenhard’s notes, in Cleveland, the court held that “mere

continuation” of a corporation’s unincorporated business line by a new corporation with nearly

the same management and the same ownership justified imposing successor liability. Id. at 1330.

The situation in Cleveland, however, bears no resemblance to the facts alleged here. Svenhard’s,

as transferor, did not “organize” another corporation (US Bakery or Mountain), let alone do so

with “practically the same shareholders and directors” and then transfer its assets to that newly

organized corporation. Thus, Cleveland does not assist Svenhard’s. For all these reasons,

Svenhard’s fails to state a claim for successor liability under Oregon law.

B. Plaintiff’s Second, Third, and Fourth Claims: Lender Liability and Fiduciary Duty

In its second claim for relief, Svenhard’s alleges “lender liability.” Svenhard’s alleges

that US Bakery “took advantage of Svenhard’s weakened financial position and exercised

control over Svenhard’s beyond that which occurs in a typical lender-debtor relationship.”

FAC ¶ 102. Svenhard’s adds that US Bakery “actively participated in Svenhard’s business

beyond the actions of a lender” and “exercised control over all relevant aspects of Svenhard’s

daily business operations, as well as over its long-term management decisions.” FAC

¶¶ 103-104. In its third claim, Svenhard’s alleges that US Bakery and Mountain “assumed

fiduciary obligations to Svenhard’s as de facto control persons” and that US Bakerry “assumed

fiduciary obligations to Svenhard’s as a controlling lender.” FAC ¶ 114. In its fourth claim,

Svenhard’s alleges that Albers, Petitt, and Hall aided and abetted US Bakery and Mountain in

breaching their fiduciary duties owed to Svenhard’s. FAC ¶¶ 119-120.

Under Oregon law, the mere exercise of control over a corporation’s affairs, whether as a

lender or otherwise, does not impose fiduciary duties on the allegedly controlling parties. Rather,

the existence of such duties depends on whether the parties are in a “special relationship,” in

which one party is obliged to pursue the other party’s best interests. See Conway v. Pacific

University, 324 Or. 231, 237 (1996) (stating that a special relationship exists when one party has

agreed to act, at least in part, to further the economic interests of the other party). Svenhard’s has

failed to allege that Defendants agreed to act, at least in part, to further the economic interests of

Svenhard’s.

Svenhard’s refers the Court to California law. Even if California law were to apply, that

would not change the result. California, like Oregon, follows the general rule that lenders, when

acting as lenders, do not owe borrowers any fiduciary duties. See, e.g., Wagner v. Benson, 101

Cal. App. 3d 27, 34-35 (1980) (holding that a bank is not required to put its customers’ interests

above its own). It is only when a lender, or anyone else, assumes through words or conduct a

duty to protect the interest of another that such a person can become liable as a fiduciary who

owes a duty of loyalty. Merely exercising some control over another is not enough; a defendant

must put itself in a position where it has assumed a “special relationship,” like the relationship

between a principal and an agent or among partners. See, e.g., Bennett v. Farmers Ins. Co., 332

Or. 138, 160, 26 P.3d 785 (2001) (stating that “unless plaintiff’s relationship with . . . defendant

qualifies as the type of ‘special relationship’ that gives rise to” a fiduciary duty, no breach of

duty can have occurred); see also City of Hope Nat’l Med. Ctr. v. Genetech, Inc., 43 Cal. 4th

375, 386 (2008) (“[B]efore a person can be charged with a fiduciary obligation, he must either

knowingly undertake to act on behalf and for the benefit of another, or must enter into a

relationship which imposes that undertaking as a matter of law.” (citation omitted)). Svenhard’s

has not sufficiently alleged a special relationship.

C. Plaintiff’s Fifth Claim: Fraud

In its fifth claim, Svenhard’s alleges that it was led to believe by Defendants’ “overt

statements and concealment of facts that [US Bakery] would assume debts of Svenhard’s,

including but not limited to, the Pension Fund withdrawal liability, trade payables, and certain

health insurance premium obligations for the unionized workforce.” FAC ¶ 127. Svenhard’s adds

that it “justifiably relied on the statements and omissions to its detriment.” Id. at 128. The only

allegedly false statements that Svenhard’s describes with particularity, however, are those

allegedly made by Albers in November 2019.

For claims sounding in fraud, Rule 9(b) of the Federal Rules of Civil Procedure sets a

heightened pleading requirement, such that a claim for fraudulent misrepresentation must state

the content of the allegedly false statements and “the time [and] place . . . of the false

representations as well as the identities of the parties to the misrepresentation.” Ramirez v.

Medtronic Inc., 961 F. Supp. 2d 977, 984 (D. Ariz. 2013) (quoting Schreiber Distrib. Co. v.

Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)). “To satisfy Rule 9(b), a pleading

must identify the who, what, when, where, and how of the misconduct charged, as well as what

is false or misleading about [the purportedly fraudulent] statement, and why it is false.” Cafasso

v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (quotation marks omitted).5

Svenhard’s has not alleged with particularity any false statements made by Defendants in 2014,

5 Malice, intent, knowledge, and other conditions of a person’s mind, however, may be

alleged generally. See Fed. R. Civ. P. 9(b).

any material omissions in 2014 when there was a duty to speak, or any fraudulent concealment.6

Relatedly, Svenhard’s has not plausibly alleged how it could have justifiably relied on any false

statements allegedly made by Albers in 2019. Accordingly, Svenhard’s has failed to state a claim

for fraud.

D. Plaintiff’s Sixth Claim: Conversion

In its sixth claim, Svenhard’s alleges that “[o]n or about November 4, 2019, [US Bakery]

and CCBC wrongfully, and without legal justification, took property of Svenhard’s at the Exeter

Property, including but not limited to computers, equipment, data, labels, inventory and supplies,

and converted the same to their own use.” FAC ¶ 130.

Under Oregon law, “[c]onversion is an intentional exercise of dominion or control over a

chattel which so seriously interferes with the right of another to control it that the actor may

justly be required to pay the other the full value of the chattel.” Scott v. Jackson County, 244 Or.

App. 484, 499 (2011) (quoting Restatement (Second) of Torts § 222A (1965)); see also Mustola

v. Toddy, 253 Or. 658, 664 (1969). To state a claim for conversion under Oregon law, a plaintiff

must allege that it was entitled to “immediate possession” of the “chattel” at issue. Willamette

Quarries, Inc. v. Wodtli, 308 Or. 406, 413 (1989) (quoting Artman v. Ray, 263 Or. 529, 531

(1972)) (alterations omitted); see also Berry v. Blair, 209 Or. 15, 18 (1956); Restatement

(Second) of Torts § 225 (“Either the person in possession of the chattel at the time of the

conversion or the person then entitled to its immediate possession may recover the full value of

the chattel at the time and place of the conversion.”).

6 See generally Unigestion Holdings, S.A. v. UPM Tech., Inc., --- F. Supp. 3d ---, 2022

WL 161491, at *11-12 (D. Or. Jan. 18, 2022) (describing Oregon law of fraud by affirmative

representation, omission, or concealment).

Although Svenhard’s challenges Defendants’ exercise and timing of their self-help

remedies in November 2019, Svenhard’s does not challenge the fact that US Bakery had a lien

on the allegedly converted property to secure the debts that Svenhard’s owed to Defendants but

had not paid. Further, even if Defendants were wrong to take possession in November 2019 of

the property at issue, Defendants eventually would have been able to take possession of that

property based on the lien. Svenhard’s has not alleged that it could have used that property for

any proper purpose in the meantime. Thus, Svenhard’s has not sufficiently alleged conversion.

E. Plaintiff’s Seventh Claim: Rescission

In its seventh claim, Svenhard’s seeks a determination that the “IP Purchase Agreement

and all related agreements are void ab initio, thereby rescinding the sale of the intellectual

property assets and restoring of all of the intellectual property assets back to Svenhard’s.” FAC,

at 33 (Prayer ¶ G).

The purpose of the remedy of rescission is to restore the parties as nearly as possible to

their positions before the transaction took place. Bodenhamer v. Patterson, 278 Or. 367, 378

(1977). Rescission acts to “unwind the transaction” and place the parties in the positions they

would have been had they not entered the transaction. Daugherty v. Young, 47 Or. App. 585, 591

(1980). The remedy of rescission is available when there is a defect in the formation of the

contract. A defendant’s false representation of a material fact, made with or without scienter,

entitles the plaintiff to rescission. Wilson v. Zimmerman/Soundarama, 261 Or. 528, 529 n.1

(1972). A party induced to enter a contract by fraud may either affirm the contract and sue for

damages or disaffirm or rescind the contract and be restored to the position that party was in

before the contract was entered. Amort v. Tupper, 204 Or. 279, 285 (1955). Rescission of a

contract based on a misrepresentation must be established by clear and convincing evidence.

Lesher v. Strid, 165 Or. App. 34, 41-42 (2000). To obtain rescission based on a unilateral

mistake, requires that the mistake is material and basic to the agreement and that the other party

must have known or, as a reasonable person, should have known of the mistake. Gardner v.

Meiling, 280 Or. 665, 674-675 (1977). A mere unilateral misunderstanding does not justify

rescission. White v. Burt, 114 Or. App. 476, 479 (1992).

Svenhard’s alleges that it entered into the IP Purchase Agreement and the License

Agreement in April 2014. FAC ¶ 133.7 Svenhard’s further alleges:

134. At the time, Svenhard’s was mistaken regarding whether

[Mountain] was going to assume Svenhard’s liabilities at the end

of the License Period. At the inception of the agreements, and

under immense time pressure caused by the defendants for their

own purposes, and by insisting that Svenhard’s not file for

bankruptcy protection at that time, [Mountain] and [US Bakery]

led Svenhard’s to believe that [Mountain] or [US Bakery] (or both)

would step in and pay Svenhard’s liabilities at the end of the

License Period.

135. [Mountain] and [US Bakery], through defendant Albers,

stated to Svenhard’s as recently as September 2019 that

[Mountain] or [US Bakery] (or both) would satisfy creditor

obligations of Svenhard’s. None of the transactional documents

state otherwise. Svenhard’s did not learn until late October 2019

that [Mountain] and [US Bakery] had no intention to satisfy any

liabilities of Svenhard’s.

136. The IP PURCHASE AGREEMENT and all related

agreements are subject to unilateral rescission because Svenhard’s

consent was given by mistake and through [Mountain] and [US

Bakery’s] fraud and though the connivance of [Mountain] and [US

Bakery’s] officers, including defendant Albers. Defendant Albers

had knowledge of [Mountain] and [US Bakery’s] wrongdoing

before [Mountain] paid consideration under the IP PURCHASE

AGREEMENT.

7 Although the IP Purchase Agreement is dated April 25, 2014 (ECF 27-1 at 9), the

License Agreement has an “effective date” of August 1, 2014 (ECF 27-1 at 17). Whether the

latter agreement was entered in April or August 2014 is not relevant to the pending motion.

137. Svenhard’s seeks rescission of the IP PURCHASE

AGREEMENT, and all related agreements, and the restoration to

Svenhard’s of all intellectual property rights transferred to MSB.

FAC ¶¶ 134-137.

In summary, Svenhard’s contends that the Court should exercise its equitable power to

rescind the 2014 transactions based either on Defendants’ fraud or a reasonable mistake by

Svenhard’s about Defendants’ intent not to assume any liabilities at the end of the license period.

FAC ¶¶ 103-105. Svenhard’s has failed to state a claim for rescission.

As discussed, Svenhard’s has failed to plead fraud with the requisite particularity.

Svenhard’s also must plead “mistake” with the same particularity that it must plead fraud. Fed.

R. Civ. P. 9(b). The 2014 transaction documents to which Svenhard’s refers in its First Amended

Complaint show an asset sale and leaseback with no express or implied obligation to assume

liabilities. Thus, if Svenhard’s is to state a claim for rescission based on mistake, it must plead

with particularity the basis of that mistake and its own reasonable reliance. As with its fraud

claim, allegations of what Albers supposedly said in 2019 does not show the basis for, or

reasonableness of, any mistake by Svenhard’s in 2014. As noted, to void a contract ab initio, a

plaintiff must point to something at the formation of the contract that justifies rescission.

Svenhard’s has not done so.

F. Plaintiff’s Eighth Claim: Violation of California Business & Professions Code § 17200

In its eighth claim, Svenhard’s alleges that the conduct of US Bakery, Mountain, and

CCBC “is unlawful, unfair and fraudulent within the meaning of [California’s] Business and

Professions Code Section 17200, et seq.” FAC ¶ 139. As relief, Svenhard’s seeks “rescission of

the sale of the intellectual property assets and restitution of all of the intellectual property assets

back to Svenhard’s.” FAC, at 34 (Prayer ¶ I).

Division 7, Part 2, Chapter 5 of the California Business and Professions Code provides

for the enforcement of California’s rules to preserve and regulate competition. Section 17200

provides:

As used in this chapter, unfair competition shall mean and include

any unlawful, unfair or fraudulent business act or practice and

unfair, deceptive, untrue or misleading advertising and any act

prohibited by Chapter 1 (commencing with Section 17500) of Part

3 of Division 7 of the Business and Professions Code.

Cal. Bus. & Prof. Code § 17200.

In response to Defendants’ motion to dismiss, Svenhard’s admits that California Business

and Professions Code § 17200 differs from Oregon’s Unlawful Trade Practices Act (UTPA),

ORS § 646.605-646.656, and that “Oregon’s statute does not offer private plaintiffs a cause of

action for ‘any other unfair or deceptive conduct in trade or commerce’ unless the Attorney

General first establishes a rule declaring specific conduct as unfair or deceptive.’” ECF 31 at 17-

18. Thus, because the Court has determined that Oregon law, and not California law, applies,

Svenhard’s has not stated a statutory claim upon which relief can be granted.

CONCLUSION

The Court GRANTS Defendants’ Motion to Dismiss (ECF 27) and gives Plaintiff leave

to replead within fourteen days from the date of this decision.

IT IS SO ORDERED.

DATED this 29th day of June, 2022.

/s/ Michael H. Simon

Michael H. Simon

United States District Judge