Opinion
civil No. 00-474-AS
April 2, 2001
OPINION
Defendant Menlo Logistics, Inc. ("Defendant"), moves to dismiss all of the claims alleged in the amended complaint filed by plaintiff Platt Electric Supply, Inc. (Plaintiff"). Defendant contends that Plaintiff has failed to adequately state its claims and that the amended complaint should be dismissed under Fed.R.Civ.P. 12(b)(6).
BACKGROUND
Plaintiff is a wholesale distributor of electrical parts and supplies. Plaintiff alleges in its Amended Complaint, that Defendant approached Plaintiff with an offer to provide Plaintiff warehouse management services. Defendant represented that it had expertise in the fields of warehouse layout, design, engineering, information systems, computer automation, productivity technology and management services, and that Plaintiff could save substantial amounts of money if it "outsourced" its warehouse functions to Defendant.
Plaintiff agreed to give Defendant considerable access to its existing warehousing facilities to allow Defendant to understand Plaintiff's warehousing needs and develop a comprehensive and viable plan to transfer control and management responsibilities for the warehouse to Plaintiff. Plaintiff rejected a number of proposals, asking Defendant to provide more detail and support for its contentions.
On June 14, 1999, the parties entered into a Warehouse Services Agreement (the "Agreement"). Incorporated into the Agreement was a written budget prepared by Defendant which represented that Plaintiff's total start up capital costs would be $1,674,501 and total operating costs from 1999 through 2003 would be $14,482,327. Plaintiff relied on this budget in signing the Agreement. Thereafter, Plaintiff laid off its entire warehouse staff and turned over all of its central warehouse functions to Defendants.
The performance of the warehouse was detrimentally affected by the change. Shipping and inventory accuracy was not up to what was represented in the Agreement, there was a substantial delay in the implementation of the computerized Warehouse Management System, high employee turnover, inconsistent performances and delays in the receiving function. Sometime in September, Defendant advised Plaintiff that continued performance under the contract was not sustainable and presented a dramatically increased budget which was required to provide effective service under the Agreement. The new budget figures called for an additional $1,332,000 in total start up costs and an additional $8,315,713 in total operating costs. The increases in the budget changed Plaintiff's expected return from 31.33 percent under the Agreement to a negative rate of return.
PRELIMINARY PROCEDURAL MATTER
Defendant also asks the court to compel Plaintiff to furnish Defendant with complete answers to interrogatory Nos. 5 and 10. The court finds that Defendant is entitled to supplements to the answers previously provided by Plaintiff. Defendant's motion to compel is granted in its entirety.
LEGAL STANDARD
Courts grant motions to dismiss under Rule 12(b)(6) only if "it appears beyond a reasonable doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Gibson v. United States, 781 F.2d 1334, 1347 (9th Cir. 1986), cert. denied, 479 U.S. 1054 (1987). The review is limited to the complaint, and all allegations of material fact are taken as true and viewed in the light most favorable to the non-moving party. Cassettari v. County of Nevada, 824 F.2d 735, 737 (9th Cir. 1987).
DISCUSSION
First Claim for Relief — Fraudulent Inducement of Contract
Plaintiff alleges that Defendant fraudulently induced Plaintiff to enter into the Agreement by:
intentionally or recklessly misrepresenting its ability to proceed on the financial basis set forth in the contract budget, and by failing to disclose that it had substantially underestimated the project requirements, a material fact that it had recognized internally before the [Agreement] was executed. [Defendant] also misrepresented its knowledge and understanding of plaintiff's warehouse operations, its professional experience in managing warehouse operations like plaintiff's and its ability to implement the computerized Warehouse Management System by the fourth quarter of 1999."
Plaintiff further alleges that these misrepresentations were material and that Plaintiff relied on them in its decision to execute the Agreement. Defendant contends that Plaintiff's allegations are insufficient to state a claim for fraudulent inducement in that: 1) they fail to allege a false statement; 2) the allegations of fraud are predicated on a future event; 3) the allegations are vague conclusions and not plead with sufficient particularity; and 4) affirmation of the Agreement is inconsistent with a claim for fraudulent inducement.
The elements of a cause of action for fraud under Oregon law are: 1) that the defendants falsely represented a material fact; 2) that the misrepresentation was knowingly made, or made with an insufficient basis for asserting its truth (scienter); 3) that the misrepresentation was made with the intention of inducing plaintiff to act or refrain from acting; 4) that plaintiff justifiably relied on defendant's misrepresentation; and 5) that plaintiff suffered resultant damage. In re Harris Pine Mills, 44 F.3d 1431, 1439 (9th Cir. 1995). See also, Riley Hill General Contractor v. Tandy Corp., 303 Or. 390, 405 (1987); Webb v. Clark, 274 Or. 387, 391 (1976).
Plaintiff alleges that Defendant misrepresented the required budget for the Agreement and that Defendant was aware that it had substantially underbudgeted the Agreement before it was executed. While not the most articulate method of pleading a fraud claim, the court finds that this language sufficiently alleges a false statement in this instance.
Promises concerning future performance are not actionable unless the plaintiff establishes that the defendant did not intend to perform when the promises were made. Hevern v. Walter E. Heller Western, Inc., 103 Or. App. 200, 204 (1990), rev. denied, 311 Or. 150 (1991). The plaintiff must show "that, at the time of the making of the promise, there was no present intention of performance or, alternatively, that the promise was made with reckless disregard as to whether the promissor could or could not perform." Webb v. Clark, 274 Or. 387, 393 n. 2, (1976) (citations omitted).
Here, Plaintiff allegations that Defendant knew it had underbudgeted the Agreement can be construed to allege that Defendant knew it would not be able to perform the terms of the Agreement within the budget presented to Plaintiff. This meets, at a minimum, the requirement that Plaintiff allege that a promise was made with reckless disregard as to whether the Defendant could or could not perform.
Fed.R.Civ.P. 9(b) states:
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.
A pleading is sufficient under Rule 9(b) if it identifies "the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations." Semegen v. Weidner, 780 F.2d 727, 735 (9th Cir. 1985) (quoting Walling v. Beverly Enterprises, 476 F.2d 393, 397 (9th Cir. 1973)). The Ninth Circuit generally requires the pleader to state the time, place and nature of the alleged fraudulent activities as well as the identities of the parties to the activities for the pleading to be sufficient. Semegen, 780 F.2d at 735. See also, Bosse v. Crowell Collier Macmillan, 565 F.2d 602, 611 (9th Cir. 1977).
Here, the court finds Plaintiff's allegations to be lacking. Plaintiff's allegations with regard to the fraudulent representations are too general to allow Defendant to frame an adequate answer or prepare an adequate defense. While the present allegations do give the reader an understanding of what is being alleged, they do not provide the specificity required under Rule 9(b). Plaintiff is directed to amend its allegations to include the specific representations relied upon for this claim.
Under Oregon law, a party is entitled to rescind or terminate a contract where the fundamental purpose of the contract has been breached or made impossible by the actions of the other party. Upon discovering facts justifying the rescission of a contract, the injured party may either affirm the contract and sue for damages or specific performance or may rescind it and be reinstated in the position that he was in before the contract was executed. Hay v. Pacific Tastee Freez, Inc., 276 Or. 569, 578 (1976). If the injured party elects to rescind the contract, he must promptly notify the other party of his or her intention to rescind and must not engage in conduct inconsistent with an intention to rescind. Bodenhammer v. Patterson, 278 Or. 367, 374-75 (1977). Notice of an intent to rescind a contract must be clear and unambiguous, must be timely and must be accompanied by an offer to return the consideration received by the party under the contract. Stovall v. Publishers Paper Co., 284 Or. 53, 56-7 (1978).
Defendant argues that Plaintiff is unable to pursue a claim for fraudulent inducement because it did not give Defendant prompt and complete notice of its intent to rescind the Agreement. Plaintiff argues that the parties mutually agreed to terminate the Agreement and that it has neither affirmed or rescinded. Plaintiff has not alleged any facts which would support or defeat an election to rescind the Agreement. Plaintiff argues that it is entitled to seek alternative remedies and to decide which remedy to pursue at a later date.
The Oregon courts recognize a plaintiff's right to seek alternative remedies and hold that there is no "binding election of remedies unless and until the first proceeding has proceeded to a judgment on the merits". Johnson v. Dave's Auto Center, 257 Or. 34, 41 (1970). Accordingly,
Plaintiff may allege a claim for fraudulent misrepresentation as well as a claim for breach of contract, which the Oregon courts have found not to be mutually exclusive. Eulrich v. Snap-On Tools Corp., 121 Or. App. 25, 41 (1993). However, if the evidence establishes that Plaintiff rescinded the Agreement, Plaintiff will be limited to its claim for fraudulent inducement. This issue is appropriately determined either by the court in a motion for summary judgment or by the ultimate factfinder at trial.
Second Claim for Relief — Negligent Misrepresentation
Defendant argues that Plaintiff's amended complaint does not state a claim for negligent misrepresentation. Defendant contends that Plaintiff fails to allege a special relationship between the parties justifying a heightened standard of care. Defendant argues that the parties were merely companies negotiating at arm's length at the time the misrepresentations were made.
The court must decide whether Oregon law imposed a duty on Defendant to use reasonable care in making certain representations to Plaintiff. It is now settled law in Oregon that "under some circumstances, one may be liable for economic loss sustained by others who rely on one's representations negligently made." Onita Pacific Corp. v. Trustees of Bronson, 315 Or. 149, 159 (1992). Any attempt to recover economic losses under a negligence claim, however, "must be predicated on a duty of the negligent actor to the injured party beyond the common law duty to exercise reasonable care to prevent foreseeable harm." Id.
Although the Court in Onita determined that the "scope of the duty" and the "scope of the recovery" should be determined on a case-by-case basis, it delineated some instances in which the law imposes or may impose a tort duty of care on a party to protect the other parties to the relationship. The Court expressly recognized the following professional or contractual relationships that give rise to a tort duty of care to further the economic interests of the client: 1) attorney-client, including intended beneficiaries of the duty to the client; 2) engineer-client, including intended beneficiaries; 3) architectclient, including intended beneficiaries; 4) agent-principal; 5) real estate agent-principal; and 6) primary insurer-excess insurer, and to the insured, to exercise care in attempting to settle third-party claims within policy limits. Id. at 160-161 (see cases cited therein). In addition, the Oregon Supreme Court also stated that "nongratuitous suppliers of information owe a duty to their clients or employers or to intended third-party beneficiaries of their contractual, professional, or employment relationship to exercise reasonable care to avoid misrepresenting facts." Id. at 165.
The relationships set forth by the Court in Onita stand in contrast to relationships that involve "two adversarial parties negotiating at arm's length to further their own economic interests." Id. at 161. In those circumstances, "economic losses arising from a negligent misrepresentation are not actionable." Id. at 161-62.
A review of the Oregon Supreme Court's discussions in both Onita and Conway v. Pacific University, 324 Or. 231 (1996), reveals that the salient feature of these relationships is one party is acting, in part, to further the economic interests of the other. Accord A.T. Kearney, Inc. v. International Business Machines Corp., 73 F.3d 238 (9th Cir. 1995).
Another way to characterize the types of relationships in which a heightened duty of care exists is that the party who owes the duty has a special responsibility toward the other party. This is so because the party who is owed the duty effectively has authorized the party who owes the duty to exercise independent judgment in the former party's behalf and in the former party's interests. In doing so, the party who is owed the duty is placed in a position of reliance upon the party who owes the duty; that is, because the former has given responsibility and control over the situation at issue to the latter, the former has a right to rely upon the latter to achieve a desired outcome or resolution.
Conway, 324 Or. at 240.
Turning to the facts of this case, Plaintiff alleges that "Defendant held itself out to be an expert in warehouse engineering, design, logistics and management" and "Defendant supplied false information to plaintiff by failing to exercise reasonable care and competence in obtaining and communicating accurate budget cost figures." Plaintiff further alleges that it "was unaware of the underestimation of the project requirements, including the inaccuracy in the efforts and man-hours defendant claimed would be required of it" and that it relied on "defendant's representations regarding its professional abilities, expertise and skills and its knowledge and understanding of Plaintiff's warehouse operations." As a result, Plaintiff incurred the same damages that it alleges for its fraudulent inducement claim.
Prior to the execution of the Agreement, the parties were engaged in negotiations targeted at inducing Plaintiff to enter into the Agreement. Defendant was clearly looking out for his own best interests in negotiating provisions intended to make a profit for Defendant. At that time, Defendant had no special responsibility to Plaintiff.
Plaintiff argues that because Plaintiff and Defendant had an existing contractual relationship at the time they were negotiating the Agreement, the court must find that Defendant owed Plaintiff a heightened duty. The amended complaint does not contain any allegations regarding an existing contractual relationship. It appears from the pleadings before the court that Plaintiff contracted with Defendant for transportation services. There is no evidence that Plaintiff authorized Defendant to exercise independent judgment with regard to these transportation services. In any event, the existing relationship dealt with services other than warehousing and would not create a special relationship between the parties with regard to the services covered by the Agreement.
Plaintiff also argues that it alleged Defendant made additional misrepresentations after the execution of the Agreement which supports it negligent misrepresentation claim. Specifically, Defendant misrepresented "(1) its knowledge and understanding of plaintiff's warehouse operations; (2) it ability to efficiently and effectively operate the warehouse facility; (3) its ability to implement the WMS by the fourth quarter of 1999; and (4) that it had obtained all the information required to operate the warehouse facility." Plaintiff also contends that Defendant failed to advise Plaintiff of the misrepresentations made before the execution of the Agreement. The misrepresentations allegedly made after the execution of the Agreement mirror those made prior to the execution. They are just a continuation of the representations relied on by Plaintiff in the execution of the Agreement. Plaintiff has failed to allege any act taken in reliance on the misrepresentations other than the execution of the Agreement. Similarly, Plaintiff seeks the same damages for the post-Agreement representations as it does for the fraudulent inducement misrepresentations, all of which occurred prior to the execution of the Agreement. Accordingly, Plaintiff has failed to allege any unique damages attributable solely to the post-Agreement representations.
The court finds that Plaintiff has failed to allege the facts necessary to create a special relationship requiring Defendant to conform to a heightened duty of care. Plaintiff has failed to state a valid claim for negligent misrepresentation.
Third Claim for Relief — Breach of Fiduciary Duty/Good Faith and Fair Dealing
Fourth Claim for Relief — Negligence
Plaintiff's Third and Fourth Claims for Relief require the existence of a special relationship justifying a heightened duty of care. For the reasons stated above, the court finds that Plaintiff has failed to allege such a relationship. These claims should be dismissed as well.
Fifth Claim for Relief — Breach of Contract
Defendant restates its elections of remedies argument in its motion to dismiss Plaintiff's Fifth Claim for Relief. For the reasons stated above, the court finds that Plaintiff's fraudulent inducement and its breach of contract claims are not mutually exclusive as a matter of law and that Plaintiff may plead these alternative remedies. Defendant's motion to dismiss Plaintiff's Fifth Claim for Relief is not well taken.
CONCLUSION
Defendant's motion (#25) to dismiss is GRANTED with regard to Plaintiff's Second, Third and Fourth Claims for Relief and DENIED with regard to Plaintiff's Fifth Claim for Relief. Defendant's motion to dismiss Plaintiff's First Claim for Relief is GRANTED with regard to Plaintiff's failure to plead fraud with the requisite particularity and Plaintiff is directed to amend its allegations to include the specific representations relied upon for this claim. Defendant's motion (#28) to compel is GRANTED.