Opinion
No. C08-0611 BZ.
February 13, 2009
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION TO DISMISS FIRST AMENDED COUNTERCLAIM
Plaintiff and counter-defendant Liberty Mutual Insurance Company ("Liberty") has moved to dismiss defendants UPA Group, L.C.'s, Amako Resort Construction (U.S.), Inc.'s, and Amir Etemadi's ("defendants") first amended counterclaim ("counterclaim") for failure to state a claim upon which relief can be granted. Defendants' counterclaim alleges common law breach of contract; breach of the implied covenant of good faith and fair dealing; negligence and negligent performance of a contract; misrepresentation; and declaratory relief. By Order dated November 18, 2008, I granted Liberty's first motion to dismiss defendant's original counterclaim, and specified the particular areas of the counterclaim that were deficient. (See Doc. No. 47.) For the following reasons, Liberty's motion is DENIED IN PART AND GRANTED IN PART.
All parties have consented to my jurisdiction, for all proceedings including entry of final judgment, pursuant to 28 U.S.C. § 636(c).
Breach of Contract and Breach of the Implied Covenant
Defendants' counterclaim for breach of contract and breach of the implied covenant of good faith and fair dealing alleges that Liberty breached paragraph Thirteen of the Indemnity Agreement which states, in part, that "[Liberty] shall have the right, at its option and sole discretion, to adjust, settle or compromise any claim, demand suit or judgment upon any Bond." (Pl.'s First Amend. Compl. Exh. 1. ¶ 13.) The counterclaim alleges, among other things, that Liberty first represented to defendants that the claims against them were without merit, that it would deny all of the City Walk Project owner's claims against the bond and that the City Walk Project owner would be obligated to pay defendants. The counterclaim further alleges that Liberty ceased communicating with defendants and prohibited them from attending meditations at which Liberty "grossly overpaid" the City Walk Project claimants and that in so doing, "Liberty breached the [Indemnity Agreement] by its failure to settle the claims . . . with the required skill, reasonable expedience and faithfulness required of it under California law." (Def.'s First Amend. Counterclaim ¶¶ 21-27, 34.) The counterclaim further alleges that defendants were not informed that Liberty had paid twenty-five million dollars to settle the City Walk Project claim until the initial case management conference in this action. (Id. at ¶ 29.)
I see no difference between defendants first and second claims for relief. Both claims allege that Liberty breached an implied term of the Indemnity Agreement by grossly overpaying claims and by failing to use care, skill, reasonable experience, and faithfulness in settling the claims.
When ruling on a motion to dismiss, if the Court "considers evidence outside the pleadings, it must normally convert the 12(b)(6) motion into a Rule 56 motion for summary judgment, and it must give the nonmoving party an opportunity to respond." U.S. v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003); Fed.R.Civ.P. 12(b). However, "documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) ( overruled on other grounds inMarder v. Lopez, 450 F.3d 445 (9th Cir. Cal. 2006)). Here, neither party questions the authenticity of the Indemnity Agreement. Accordingly, I may consider the terms of the Indemnity Agreement in ruling on defendants' motion to dismiss.
Accepting as true all material allegations, as well as all reasonable inferences to be drawn from them, so as to construe the pleading in the light most favorable to the non-moving party, I find that defendants have sufficiently pled a claim for breach of the implied covenant of good faith and fair dealing in the Indemnity Agreement. "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." Carma Developers, Inc. v. Marathon Dev. California, Inc., 2 Cal.4th 342, 371 (1992). While the Indemnity Agreement gives Liberty broad discretion to settle all outstanding claims against defendants, it does not relieve it of the implied obligation to exercise its discretion in good faith. "The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith." Id. at 372.
This is consistent with the general rule that a surety is not entitled to indemnification for any payments made fraudulently or without good faith. See Arntz Contracting Co. v. St. Paul Fire Marine Ins. Co., 47 Cal.App.4th 464 (1996) ("A surety is not entitled to indemnification for amounts paid in settlement of claims upon its bonds if the settlement is not made in good faith."). Defendants have sufficiently alleged that Liberty did not exercise its discretion to settle the City Walk Project claim in good faith; therefore, Liberty's motion to dismiss defendants' first and second claims for relief is DENIED.
Liberty'S reliance on Travelers Casualty Surety Co. of Amer. v. Amoroso, 2004 WL 1918890 (N.D. Cal.) is misplaced sinceAmoroso, does not discuss or cite to Arntz, the state court ruling most on point.
Negligence and Negligent Performance of Contract
Negligent Misrepresentation
Erlich v. Menezes,21 Cal.4th 543551Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal.4th 503 515 Cates Construction, Inc. v. Talbot Partners,21 Cal.4th 2844-45 GRANTED. 8Berger v. Seyfarth Shaw, LLP,2008 WL 4067436Neubronner v. Milken, 6 F.3d 666671(See DENIED. Golden Eagle Ins. Co. v. Travelers Cos.103 F.3d 750753overruled on other grounds by Gov't Employees. Ins. Co. v. Dizol, 133 F.3d 1220 see also Federal Kemper Ins. Co. v. Rauscher, 807 F.2d 345352 Wilton v. Seven Falls Co. 515 U.S. 277 286-87 Greater Los Angeles Council on Deafness, Inc. v. Zolin, 812 F.2d 11031112 Doe v. Gallinot,657 F.2d 10171024 28 U.S.C. § 2201
Defendants' reliance on Eads v. Marks, 39 Cal.2d 807, 811 (1952) is misplaced. Eads has been refuted by later California case law that establishes the independent duty requirement.
Defendants mistakenly rely on North American Chemical Co. v. Superior Court, 59 Cal.App.4th 764 (1997), for the proposition that negligent performance of a contract may be a breach of contract or a tort, and a party may assert both claims until the appropriate time for an election of remedies. While that statement may be true in certain contexts, Menezes and Cates Construction, decided after North American Chemical, make clear that this is not one of them.
Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.Proc. 9(b).
To the extent that defendants are claiming that Etemadi was induced to enter into the Indemnity Agreement in his individual capacity by the misrepresentation that Liberty would also induce Anderson to do the same, I do not read paragraphs ten and sixteen of the Indemnity Agreement as barring that claim as a matter of law.
The Declaratory Judgment Act ("DJA") permits a federal court to "declare the rights and other legal relations" of parties to "a case of actual controversy." 28 U.S.C. § 2201; see Wickland Oil Terminals v. Asarco, Inc., 792 F.2d 887, 893 (9th Cir. 1986). "A declaratory judgment is inappropriate solely to adjudicate past conduct." Delaware State University Student Housing Foundation v. Ambling Management Co., 556 F.Supp.2d 367, 374-4 n. 52 (D. Del. 2008); see also Alpine Group, Inc. v. Johnson, Case No. 01-5532, 2002 WL 10495, at *4 (S.D.N.Y. Jan. 3, 2002). Because defendants are not entitled to declaratory relief with respect to past wrongs, Liberty's motion to dismiss defendants' claim for declaratory relief regarding the City Walk Project is GRANTED; however, to the extent that defendants also seek declaratory relief with respect to the Curry Village Project, Liberty's motion is DENIED.
Liberty shall file an answer by March 2, 2009.