Opinion
CV-22-00949-PHX-DWL
10-21-2022
One Call Construction Services LLC, Plaintiff, v. Sunroad Real Estate Holding Corporation, et al., Defendants.
ORDER
Dominic W. Lanza United States District Judge
Plaintiff One Call Construction Services LLC (“One Call”) was hired by Defendants Sunroad Real Estate Holding Corporation d/b/a Sunroad Real Estate Investments and Sunroad Kierland Apartments, LLC (collectively, “Sunroad”) to remodel and renovate 23 apartment units. This dispute arises from Sunroad's failure to pay One Call for the work.
Now pending before the Court is Sunroad's motion to dismiss Count Two of the complaint. (Doc. 9.) For the following reasons, the motion is denied.
BACKGROUND
I. Facts
The following facts, which are presumed true for purposes of a motion to dismiss, are derived from the complaint. Sunroad hired One Call to “perform construction work” (the “Work”) on about 23 apartment units of the Nines at Kierland located in Scottsdale, Arizona. (Doc. 9-2 ¶ 7.) “There was an understanding and/or agreement between Sunroad and One Call that One Call would perform the Work for a certain price and would receive timely payment.” (Id. ¶ 8.) “One Call performed the Work at the Project timely, in good faith, and to acceptable levels of workmanship.” (Id. ¶ 9.)
Sunroad asks the Court to take judicial notice of the complaint. (Doc. 9-2.) This request is unnecessary because the complaint is already in the record. (Doc. 1 at 9-14.) Nevertheless, for ease of reference, the Court will refer to the copy provided at Doc. 9-2.
“Upon information and belief, Sunroad expected the work to be done within 21 days, but One Call never agreed to this turnaround time.” (Id. ¶ 11.) So, “One Call was into some of [the] units at 30 days, mostly due to delays in cabinets, tops, and parts from Sunroad's vendors.” (Id. ¶ 12.)
Then, “One Call got an email and/or text from its supervisor who said they were locked out the previous night by Sunroad” without warning. (Id. ¶¶ 14-15.) One Call was “not allowed to walk the units, retrieve any materials or tools, etc.” (Id. ¶ 16.) Sunroad further prevented One Call from “documenting] the progress of the invoice for future reference.” (Id. ¶ 17.) Currently, “Sunroad is withholding payment for the Work of at least [$227,000] from One Call.” (Id. ¶ 18.)
One Call asserts four claims against Sunroad: (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) promissory estoppel, and (4) unjust enrichment. (Id. ¶¶ 20-42.) In Count Two, which is the only claim at issue here, One Call alleges that “there is an implied covenant of good faith and fair dealing in every contract.” (Id. ¶ 29.) One Call further alleges that the underlying “understanding and/or agreement between One Call and Sunroad for the Work at The Nines constituted a legally binding contract” and that “Sunroad's acts described herein were intentional and in breach of the covenant of good faith and fair dealing owed to Plaintiff under the contract.” (Id. ¶¶ 3031). One Call also requests punitive damages because “Sunroad's actions were gross, wanton, intentional, and/or in reckless disregard of [One Call's] rights.” (Id. ¶ 32.)
II. Procedural History
On May 10, 2022, One Call filed the complaint in state court. (Doc. 9-2 at 9.)
On June 1, 2022, Sunroad timely removed this action to federal court. (Doc. 1.)
On June 8, 2022, Sunroad filed its motion to dismiss. (Docs. 9, 9-1.) The motion is now fully briefed. (Docs. 10, 13.)
One Call's request for oral argument is denied because the issues are fully briefed and argument would not aid the decisional process. See LRCiv 7.2(f).
On September 30, 2022, at the parties' request, the Court referred this action to Magistrate Judge Burns for a settlement conference. (Doc. 22.) The settlement conference has not yet occurred. (Doc. 23.)
DISCUSSION
I. Legal Standard
“[T]o survive a motion to dismiss under Rule 12(b)(6), a party must allege ‘sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'” In re Fitness Holdings Int'l, Inc., 714 F.3d 1141, 1144 (9th Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “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.” Id. (quoting Iqbal, 556 U.S. at 678). “[A]ll well-pleaded allegations of material fact in the complaint are accepted as true and are construed in the light most favorable to the non-moving party.” Id. at 1444-45 (citation omitted). However, the court need not accept legal conclusions couched as factual allegations. Iqbal, 556 U.S. at 679-80. Moreover, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 679. The court also may dismiss due to “a lack of a cognizable theory.” Mollett v. Netflix, Inc., 795 F.3d 1062, 1065 (9th Cir. 2015) (citation omitted).
II. Count Two
A. The Parties' Arguments
Sunroad argues that Count Two must be dismissed because, under Arizona law, a plaintiff seeking to recover in tort for a breach of the covenant of good faith and fair dealing must show “a special relationship between the parties.” (Doc. 9-1 at 5, quoting Burkons v. Ticor Title Ins. Co., 813 P.2d 710, 720 (Ariz. 1991).) Sunroad argues that “no special relationship existed between One Call and Sunroad” because the contract is an “ordinary construction agreement for the performance of construction work . . . in exchange for payment.” (Id. at 6-7.)
One Call makes three arguments in response. (Doc. 10.) First, One Call contends that, under Burkons, tort damages are recoverable for “contracts in which there is a special relationship between the parties arising from elements of public interest” and that elements of public interest were present here because the contract ensured the apartments were “habitable, modernized, and comfortable for residential use by individuals and families- all while remaining, of paramount importance, safe for each future resident thereat.” (Doc. 10 at 5-6.) Second, One Call argues that the parties' agreement qualifies as “the procurement of service,” which is a permissible special relationship under Burkons and Arizona law, because One Call's “construction-related expertise, know-how, and labor, in addition to necessary materials” was an important part of the bargain. (Id. at 6.) Third, One Call argues that Arizona law permits the assessment of tort damages when “contract damages would promote breach of the contract rather than its performance” and that the “breach of contract by Sunroad was financially motivated as more convenient and advantageous to Sunroad than to merely comply with the payment terms agreed to by the parties.” (Id.) One Call also cites the Revised Arizona Jury Instructions in an attempt to demonstrate that Arizona courts allow tort damages for breach of the covenant of good faith and fair dealing outside the insurance context. (Id. at 6-8.)
In reply, Sunroad argues that One Call “misreads and misapplies” Arizona law. (Doc. 13 at 2.) As for One Call's first argument, Sunroad contends that “Burkons does not provide, as One Call seems to believe, for tort recovery on any contract which may benefit members of the public. Rather, Burkons allows such recovery when the parties to a contract have a special relationship which arises out of the public interest or a fiduciary responsibility. One Call and Sunroad have a purely commercial relationship under the Contract.” (Id. at 2-3.) As for One Call's second argument, Sunroad argues that One Call did not provide the type of “service” contemplated by Arizona law and contends that “[i]f the Arizona Supreme Court intended tort recovery to be available for breach of contract on any professional services contract, it would not have specified that a contract would need to arise out of a ‘special relationship' or be ‘undertaken for something more than or other than commercial advantage.'” (Id. at 3-4.) As for One Call's third argument, Sunroad contends that (1) One Call's damages are purely economic, such that recovery in contract would make it whole, and (2) “no Arizona court has ever allowed the recovery of such tort damages in the context of private, purely commercial construction contracts” and “courts in other jurisdictions have flatly refused to extend the recovery of tort damages to payment breaches on construction contracts.” (Id. at 4-5.) Sunroad also contends that any case law cited by One Call is distinguishable. (Id. at 5-7.)
B. Analysis
1. Availability Of Tort Damages Under Count Two
Arizona “law implies a covenant of good faith and fair dealing in every contract.” Rawlings v. Apodaca, 726 P.2d 565, 569 (Ariz. 1986). “The essence of that duty is that neither party will act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship.” Id. “The duty not to act in bad faith or deal unfairly thus becomes a part of the contract, and, as with any other element of the contract, the remedy for its breach generally is on the contract itself.” Wagenseller v. Scottsdale Mem'l Hosp., 710 P.2d 1025, 1038 (Ariz. 1985). Nevertheless, “[i]n certain circumstances, breach of contract, including breach of the covenant of good faith and fair dealing, may provide the basis for a tort claim.” Id. “Courts have been reluctant, however, to extend the tort action beyond the insurance setting. The rationale for permitting tort recovery in insurance contract disputes and not in disputes involving other contracts has been founded largely upon the existence of a ‘special relationship' between insurer and insured.” Id. at 1040. Therefore, only “in certain circumstances” will “the breach of the implied covenant . . . provide the basis for imposing tort damages.” Burkons, 813 P.2d at 720.
The rationale for allowing tort damages in the insurance context is “[t]he special nature of an insurance contract [that] has been recognized by courts and legislatures for many years. . . . An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity.” Noble v. Nat'l Am. Life Ins. Co., 624 P.2d 866, 867 (Ariz. 1981). Additionally, “[often the insured is in an especially vulnerable economic position when such a casualty loss occurs. The whole purpose of insurance is defeated if an insurance company can refuse or fail, without jurisdiction, to pay a valid claim.” Id. at 868.
Thus, in Rawlings, the Arizona Supreme Court held that tort damages were recoverable in an action against a homeowner's insurance company for breach of the implied covenant because “one of the benefits that flow from the insurance contract is the insured's expectation that his insurance company will not wrongfully deprive him of the very security for which he bargained or expose him to the catastrophe from which he sought protection.” 726 P.2d at 571.
Similarly, in Dodge v. Fid. & Deposit Co. of MD, 778 P.2d 1240 (Ariz. 1989), a plaintiff was able to recover tort damages pursuant to an implied-covenant claim against a surety company because “the purpose of the construction performance bond required by plaintiffs' contract with Homes was not for plaintiffs' commercial advantage, but to protect plaintiffs from calamity-Homes' default on the contract.” Id. at 1242. The court emphasized that, as with an insurance contract, “[a] contractor's default has the potential for creating great financial and personal hardship to a homeowner. Surety insurance is obtained with the hope of avoiding such hardships. Imposing tort damages on a surety who in bad faith refuses to pay a valid claim will deter such conduct.” Id. The court also identified the two most important factors to consider when determining whether to allow tort damages based on an implied-covenant claim: “(1) whether the plaintiff contracted for security or protection rather than for profit or commercial advantage, and (2) whether permitting tort damages will ‘provide a substantial deterrence against breach by the party who derives a commercial benefit from the relationship.'” Id. (citation omitted).
Finally, in Burkons, the court stated that tort damages are available for breach of the implied covenant arising from “contracts in which there is a special relationship between the parties arising from elements of public interest, adhesion, and fiduciary responsibility.” 813 P.2d at 720. “Among the special relationships in which such tort damages for breach of contract may be available are those undertaken for something more than or other than commercial advantage, such as the procurement of service, professional help, security, or other intangibles.” Id. Applying these standards, the court disallowed a claim for tort damages arising from a title company's breach of an escrow contract, explaining that “we can conceive of [no reason] why the traditional contract damage rule would not provide adequate compensation under the facts of this case” and that “[w]hatever the applicability of bad faith breach of contract theory to agreements between an escrow agent and the parties to the escrow, an issue we need not determine now, the facts of this case do not support such a theory.” Id. at 720-21.
With these principles in mind, the Court has little trouble concluding that One Call cannot recover tort damages against Sunroad pursuant to Count Two. First, there is no merit to One Call's argument that its renovation and remodeling contract with Sunroad is somehow a “contract[] in which there is a special relationship between the parties arising from elements of public interest.” Burkons, 813 P.3d at 720. One Call focuses narrowly on Burkons's use of the phrase “public interest” and suggests that tort damages would be available for the breach of any commercial contract that has the indirect effect of benefiting the public, but this approach ignores Burkons's additional requirement of a “special relationship.” As discussed above, Arizona courts have stated that a special relationship arises only when the contract was undertaken to protect “something more than or other than commercial advantage,” as in the insurance (Rawlings) and surety (Dodge) contexts. The contract at issue here was a standard construction contract between two commercial counterparties. One Call has not identified any case, from Arizona or elsewhere, authorizing tort damages for the breach of the implied covenant arising from such a contract. Cf. Erlich v. Menezes, 981 P.2d 978, 989 (Cal. 1999) (disallowing claim for tort damages arising from breach of construction contract to build a residential home and noting that “[m]ost other jurisdictions have reached the same conclusion”).
Nor is there any merit to One Call's assertion that because the contract was for “the procurement of service,” tort damages must be available. Once again, One Call errs by focusing too narrowly on one particular phrase that appears in Burkons while ignoring the surrounding context that helps define and explain that phrase. Under Burkons, tort damages are available when there “is a special relationship between the parties arising from elements of public interest, adhesion, and fiduciary responsibility,” and “[a]mong the special relationships in which such tort damages for breach of contract may be available are those undertaken for something more than or other than commercial advantage, such as the procurement of service, professional help, security, or other intangibles.” 813 P.2d at 720. Indeed, in Burkons, the underlying contract was a contract for services, yet the court disallowed any claim for tort damages. What was missing there, as here, is a special relationship undertaken for something more than (or other than) commercial advantage.
As for One Call's final argument, the second factor in Dodge is whether permitting tort damages will substantially deter breach by the party who derives a commercial benefit from the relationship. 778 P.2d at 1243. See also Burkons, 813 P.2d at 721 n.7 (“Compare, for instance, the case where a medical insurer refuses without tenable grounds to approve a $1,000 surgical procedure for its insured, thus preventing the insured from obtaining needed medical treatment and leading to serious disease or death. If all the insurer risks by its groundless refusal to perform its contract is the $1,000 it would have owed in any event, then it is to its advantage to refuse, without grounds, payment of the claim in every instance where the market rate of interest exceeds the legal rate of interest.”). That is not the case here. There is no allegation that Sunroad gained a benefit by breaching. (See, e.g., Doc. 13 at 4 [“There is nothing advantageous for Sunroad to breach the Contract as it would have to pay interest and possible attorneys' fees in addition to the sum in dispute.”].) At any rate, Burkons explains that no liability will be imposed in tort “on a bad faith theory because a party who breached a contract fails to accede to the other party's demand for payment of contract damages.” 813 P.3d at 720. This is what occurred here. One Call demanded payment, Sunroad refused, and this lawsuit commenced.
To the extent One Call asserts that the RAJIs support its position, those instructions are not binding. Cf. State v. Miller, 485 P.3d 554, 558 (Ariz. 2021).
2. Propriety Of Dismissal
For the reasons stated above, the Court agrees with Sunroad that One Call cannot obtain tort damages based on its implied-covenant claim in Count Two. But this conclusion does not end the analysis. The relief sought in Sunroad's motion is the wholesale dismissal of Count Two for failure to state a claim under Rule 12(b)(6). (Doc. 9-1 at 2.)
The Court is not persuaded that dismissal is warranted at this juncture because Count Two is not styled as a tort claim-instead, it is a claim for “Breach of the Covenant of Good Faith and Fair Dealing.” (Doc. 9-2 at 7.) As discussed in Part II.B.1 above, such a claim may lie in tort or contract under Arizona law, depending on the circumstances. Thus, even though Sunroad has established that Count Two does not lie in tort, this does not mean that Count Two necessarily fails. Instead, it simply means that One Call will be limited to contract remedies should it prevail. Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Tr. Fund, 38 P.3d 12, 29 (Ariz. 2002) (“There is a difference . . . in the proof required, depending on whether the claim sounds in tort or in contract. Here, the remedy for breach of the implied covenant is an action for breach claiming contract damages. When the remedy for breach of the covenant sounds in contract, it is not necessary for the complaining party to establish a special relationship . . . . The claim presented in the Funds' counterclaim alleges breach of contract, a claim that is thus viable without the special relationship required for tortious relief.”). Nor is Count Two necessarily duplicative of One Call's claim in Count One for breach of contract. Id. (noting that “[t]he duty of good faith extends beyond the written words of the contract” and thus “a party may . . . breach its duty of good faith without actually breaching an express covenant in the contract.”) (citations omitted); United Dairymen of Ariz. v. Schugg, 128 P.3d 756, 760-61 (Ariz.Ct.App. 2006) (“A party can breach the implied covenant of good faith and fair dealing without breaching an express provision of the underlying contract.”).
There are, to be sure, features of the complaint that can be read as implying that Count Two is a tort claim. For example, one of the paragraphs under Count Two asserts a claim for punitive damages (Doc. 9-2 ¶ 32), whereas none of the paragraphs under the remaining counts specifically mentions punitive damages. In isolation, this might suggest that Count Two is a tort claim while the other counts are contract claims. Similarly, none of the paragraphs under Count Two mentions the availability of attorneys' fees under A.R.S. 12-341.01, whereas those fees are specifically mentioned in the paragraphs beneath One Call's claims for breach of contract (Doc. 9-2 ¶ 27) and promissory estoppel (id. ¶38). This, too, could be viewed in isolation as an indication that Count Two, alone, is a tort claim. Nevertheless, it is significant that each count in the complaint (including Count Two) incorporates, by reference, all of the allegations in the complaint. (Id. ¶¶ 20, 28, 33, 39.) Accordingly, Claim Two can be plausibly interpreted as a contract-based implied-covenant claim.
The Court acknowledges that One Call did not seek to avoid the dismissal of Count Two on this basis (and, if anything, seemed to accept the premise that Count Two would be subject to dismissal if tort remedies were deemed unavailable). Nevertheless, it was Sunroad's burden, as the movant, to demonstrate an entitlement to relief under Rule 12(b)(6). Cohen v. Bd. of Trs. of Univ. of D.C., 819 F.3d 476, 481 (D.C. Cir. 2016) (noting the consensus among federal courts that “Federal Rule 12(b)(6) places th[e] burden [of persuasion] on the moving party”). Sunroad has not met that burden here because its motion rests on the inaccurate premise that the unavailability of tort remedies requires the dismissal of an implied-covenant claim. Sunroad may have effectively achieved what it sought to achieve through its motion-that is, clarification that tort remedies are unavailable-but Count Two still remains.
Accordingly, IT IS ORDERED that Sunroad's motion to dismiss (Doc. 9) is denied.