Case Name: Finclusion Labs, Inc. dba WeTrust v. Ron Merom, et al.

Case No.: 18CV323768

(1) Defendant and Cross-Complainant Ron Merom’s Motion to Compel Plaintiff and Cross-Defendant Hoang Nguyen to Provide Complete Responses to Form Interrogatories and for Sanctions
(2) Defendant and Cross-Complainant Ron Merom’s Motion to Compel Plaintiff and Cross-Defendant Patrick Long to Provide Complete Responses to Form Interrogatories and for Sanctions
(3) Defendant and Cross-Complainant Ron Merom’s Motion to Compel Plaintiff and Cross-Defendant George Li to Provide Complete Responses to Form Interrogatories and for Sanctions

Factual and Procedural Background

First Amended Complaint

Founded in January 2017, plaintiff Finclusion Labs, Inc. dba WeTrust (“Finclusion”) creates decentralized, peer-to-peer financial solutions that promote financial inclusion. (First Amended Complaint (“FAC”), ¶1.) In conjunction with formation of Finclusion, each co-founder, including defendant Ron Merom (“Merom”), was granted 25% of the company’s outstanding stock, subject to a vesting agreement entered into at a later date (“Vesting Agreement”). (FAC, ¶3.) Pursuant to the Vesting Agreement, if any co-founder separated from the company within one year of his respective stock grant, his shares would not vest, they would revert back to the company, and he would not be entitled to retain ownership of any company stock. (Id.) Defendant Merom was terminated prior to the agreed upon one year vesting cliff, but is attempting to now sell a portion of the shares originally granted to him that failed to vest and that the company has repurchased. (Id.)

In addition, while employed at Finclusion, defendant Merom transferred Finclusion digital currency tokens to accounts he controls and has refused to provide the passwords necessary to obtain these assets. (FAC, ¶4.) Defendant Merom refused to return possession of these assets to Finclusion until his severance demands were met. (Id.) Defendant Merom also failed to disclose to Finclusion the full extent of its assets under his exclusive control despite repeated requests by the company. (Id.)

On or about June 2017, Finclusion and Merom began negotiating a separation agreement. (FAC, ¶5.) In connection with those negotiations, Merom took an advance payment on his severance in the amount of $62,500. (Id.) Finclusion provided this advance with the understanding that Merom would continue to negotiate a severance agreement in good faith and was contingent upon the parties reaching a finalized severance agreement. (Id.) The parties never finalized an agreement and defendant Merom refuses to return the $62,500. (Id.)

As part of the draft severance agreement that was never finalized or executed, Finclusion agreed to reimburse Merom his legal fees incurred in negotiating this agreement. (FAC, ¶6.) Reimbursement was contingent upon execution of a severance agreement. (Id.) Unbeknownst to Finclusion, defendant Merom immediately began charging his attorney’s fees to a Finclusion-issued credit card without authorization. (Id.) Defendant Merom charged approximately $50,000 to his company issued credit card, the parties failed to reach a severance agreement, and yet defendant Merom refuses to return approximately $40,000 of these fees. (Id.)

On or about December 17, 2017, after being instructed by Finclusion that he was prohibited from deleting and/or altering any data or information from his company-issued laptop, defendant Merom deleted data from the device before returning it to Finclusion one day later. (FAC, ¶7.) Finclusion incurred significant expense for a forensic analysis to determine whether defendant Merom deleted data. (Id.)

On February 21, 2018, Finclusion filed a complaint against defendant Merom. On April 25, 2018, Finclusion filed the FAC against defendant Merom asserting causes of action for:

(1) Fraud
(2) Fraudulent Inducement
(3) Intentional Misrepresentation
(4) Civil Theft and Conversion of Company Assets
(5) Civil Theft and Conversion of Improperly Charged Legal Fees
(6) Unjust Enrichment (Advanced Severance)
(7) Unjust Enrichment (Advanced Legal Fees)
(8) Breach of Contract
(9) Violation of Cal. Penal Code §502(c)(4)
(10) Declaratory Relief

On May 30, 2018, defendant Merom filed a demurrer to the first three causes of action of the FAC. On August 16, 2018, the court sustained defendant Merom’s demurrer without leave to amend. On October 9, 2018, defendant Merom filed a general denial to the FAC.

Cross-Complaint

On July 20, 2018, defendant Merom filed a cross-complaint against Finclusion, George Li (“Li”), Hoang Nguyen (“Nguyen”), and Patrick Long (“Long”) (Li, Nguyen, and Long are collectively referred to as “Individual Cross-Defendants”). The cross-complaint alleges Merom and the Individual Cross-Defendants are co-founders of Finclusion. (Cross-Complaint, ¶11.) Finclusion was formed in January 2017 and financed by an Initial Coin Offering in which Finclusion offered to sell and sold a form of cryptocurrency (i.e., TrustCoins or TRST) to the public. (Cross-Complaint, ¶13.) Finclusion raised 1,048 BTC (bitcoin) and 80,092 ETH (Ethereum) by selling TrustCoin tokens to the public who, in return for their payment, received a proportionate number of TrustCoin tokens. (Cross-Complaint, ¶14.)

Finclusion originally had three stockholders: Merom, Li, and Long. (Cross-Complaint, ¶15.) Merom originally owned 7 million shares of fully vested Finclusion common stock. (Id.) Finclusion subsequently added Nguyen as a stockholder with the three original stockholders transferring 1.75 million shares of their respective Finclusion common stock to Nguyen, after which each of the four owned 5.25 million shares or 25% of Finclusion common stock on a fully vested basis. (Cross-Complaint, ¶16.)

In May 2017, Li executed a Board Resolution effective January 25, 2017 in which Finclusion’s founders each purportedly purchased and were issued 5.25 million shares of common stock, equal to 25% of Finclusion’s issued and outstanding common stock. (Cross-Complaint, ¶¶17 – 18.) Pursuant to the Board Resolution, the shares were fully vested and offered and sold under the terms of Restricted Stock Purchase Agreements (“RSPA”). (Cross-Complaint, ¶19.) Each of the founders signed the RSPA in May 2017. (Cross-Complaint, ¶¶20 – 21.) The RSPA contains an integration clause and cannot be amended except by written document. (Cross-Complaint, ¶¶24 – 25.) The RSPA has never been amended. (Cross-Complaint, ¶26.)

Finclusion and the TrustCoins have continued to decrease in value due to mismanagement and conflicts of interest on the part of the Individual Cross-Defendants. (Cross-Complaint, ¶30.) On or about June 8, 2018, Bittrex, a leading cryptocurrency exchange, delisted Finclusion’s TrustCoins. (Cross-Complaint, ¶31.) Between January and July 2018, TrustCoins plummeted in valued from $1.34 to $0.04 each. (Cross-Complaint, ¶32.)

Finclusion CEO, cross-defendant Li, was involved in a bitterly contested divorce. (Cross-Complaint, ¶33.) Li personally benefitted from a decrease in the value of Finclusion stock in which his wife claimed a 50% community interest. (Cross-Complaint, ¶34.) Li, without objection by Nguyen or Long, actively sought to decrease the value of Finclusion stock. (Cross-Complaint, ¶¶35 – 37.) Merom notified the other board members of Li’s conflict of interest, but they took no formal action. (Cross-Complaint, ¶¶59 – 60.)

Merom sought access to Finclusion documents in order to sell his common stock to a third party. (Cross-Complaint, ¶38.) Finclusion initially agreed to provide Merom with access to the documents he requested, but later refused despite Merom signing a Non-Disclosure Agreement. (Cross-Complaint, ¶¶39 – 42 and 68 – 71.)

The Individual Cross-Defendants converted Finclusion assets for their personal benefit. (Cross-Complaint, ¶¶43 and 66.) Li engaged in self-dealing by having Finclusion sponsor a conference organized by an individual who loaned money to Li, essentially a kickback to Li. (Cross-Complaint, ¶¶44 – 50.)

The Individual Cross-Defendants excluded Merom from Finclusion decision and conspired to force Merom’s resignation. (Cross-Complaint, ¶64.) After obtaining Merom’s reputation and technical expertise, Finclusion asked Merom not to come to the company’s offices and later revoked Merom’s administrative privileges for accessing Finclusion data. (Cross-Complaint, ¶65.)

On January 17, 2018, Finclusion formally terminated Merom without cause in order to fabricate a reason to deny Merom access to Finclusion documents. (Cross-Complaint, ¶73.) The Individual Cross-Defendants also engineered a reverse stock split without notifying Merom. (Cross-Complaint, ¶80.) Li arranged a November 2017 meeting with Merom and brought an attorney under false pretenses who attempted to coerce Merom into agreeing to severance terms and a vesting agreement. (Cross-Complaint, ¶86.) Merom did not agree to subject his stock to vesting or repurchase. (Cross-Complaint, ¶¶88 – 89.) Notwithstanding any lack of agreement, Finclusion purported to repurchase Merom’s common stock. (Cross-Complaint, ¶90.)

Merom’s cross-complaint asserts the following causes of action:

(1) Breach of Contract
(2) Breach of the Covenant of Good Faith and Fair Dealing
(3) Breach of Fiduciary Duty
(4) Conversion of Personal Property
(5) Violation of California Labor Code
(6) Declaration of Stock Ownership
(7) Removal of Directors for Fraud and Dishonesty
(8) Wrongful Termination in Violation of Public Policy
(9) Violation of Cal. Labor Code §2802 and Cal. Corporations Code §317

On August 21, 2018, cross-defendants filed (1) a demurrer to the third, fifth, seventh, eighth, and ninth causes of action of the cross-complaint; and (2) a motion to strike portions of the cross-complaint. On November 8, 2018, the court issued an order overruling cross-defendants’ demurrer to the cross-complaint except as to the eighth cause of action which the court sustained without leave to amend. The court denied the motion to strike portions of the cross-complaint.

On December 5, 2018, the cross-defendants filed an answer to the cross-complaint.

Discovery Dispute

On some unspecified date, defendant and cross-complainant Merom served the Individual Cross-Defendants with form interrogatories.

On or about September 28, 2018, the Individual Cross-Defendants served responses to Merom’s form interrogatories.

In an email dated December 5, 2018, the Individual Cross-Defendants’ counsel responded to a letter from Merom’s counsel dated December 3, 2018 summarizing a telephone call where counsel met and conferred. In that December 5, 2018 email, the Individual Cross-Defendants’ counsel states, among other things, “Amended answers to Mr. Merom’s RFAs and Form Interrogatories to the Individual Cross-Defendants (i.e., Li, Long, and Nguyen) by December 21, 2018. Confirmed.”

Without any evidentiary support, Merom’s counsel asserts that in spite of her agreement to provide amended responses, the Individual Cross-Defendants’ counsel “provided unverified and incomplete responses … to the Form Interrogatories to the Individual Cross-Defendants on December 28, 2018.”

The Individual Cross-Defendants retained new counsel on February 6, 2019.

On February 19, 2019, Merom filed the instant motions to compel the Individual Cross-Defendants’ further response to form interrogatories.

I. Defendant and cross-complainant Merom’s motions to compel the Individual Cross-Defendants’ further response to form interrogatories are DENIED.

In opposition, the Individual Cross-Defendants contend Merom’s motions to compel are untimely. “Unless notice of this motion is given within 45 days of the service of the verified response, or any supplemental verified response, or on or before any specific later date to which the propounding party and the responding party have agreed in writing, the propounding party waives any right to compel a further response to the interrogatories.” (Code Civ. Proc., §2030.300, subd. (c).)

In reviewing the separate statements submitted by Merom, it appears Merom is seeking to compel further responses to the Individual Cross-Defendants’ initial responses which were served on or about September 28, 2018. The deadline to file a motion to compel further response to these initial responses expired on or about November 19, 2018. Since Merom did not file these motions until February 19, 2019, Merom has waived any right to compel a further response.

Accordingly, Merom’s motions to compel the Individual Cross-Defendants’ further response to form interrogatories are DENIED. Merom’s request for sanctions is DENIED.

The Individual Cross-Defendants apparently voluntarily agreed to amend their responses to form interrogatories, numbers 17 and 50.1 – 50.3, and did so by serving verified amended responses on February 21, 2019. To the extent Merom finds these amended responses to be deficient, Merom may bring a timely motion to compel a further response following a reasonable and good faith attempt at informal resolution of each of the issues.