The opinion of the court was delivered by: David Alan Ezra United States District Judge
ORDER: GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS FIRST AMENDED COMPLAINT, OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT
On April 18, 2012, the Court heard Defendants Pacific Source, Inc. and Mark Mason's Motion to Dismiss First Amended Complaint, or in the Alternative, for Summary Judgment. Arnold Thielens Phillips II, Esq., appeared at the hearing on behalf of Plaintiffs Timothy J. Fitzgerald and Gordon P.A. Smith; Simon Kelvansky, Esq., and Nicole D. Stucki, Esq., appeared at the hearing on behalf of Defendants. After reviewing the motions and the supporting and opposing memoranda, the Court GRANTS IN PART AND DENIES IN PART Defendants' Motion to Dismiss, or in the Alternative, for Summary Judgment. (Doc. # 59).
This case stems out of bonding agreements involving the construction of two separate properties on Maui. Defendant Pacific Source, Inc. ("PSI") is a material supplier in the State of Washington that also provides "materialmen's" construction bonds on projects pursuant to which it serves as a surety. (Doc. # 13-1 ¶ 3.) Defendant Mark Mason ("Mason") is president of PSI. ("Mason Decl.," Doc. # 60-1 ¶ 1.) Aloha Package Homes ("APH") was a company that provided homebuilding services, including designing homes, providing materials, and helping customers find a contractor. ("Parsons Aff.," Doc. # 67-3 ¶ 3.) Virginia Parsons ("Parsons") was the sole member-manager of APH. ("Parsons Decl.," Doc. # 69-1 ¶ 3.) For several years, PSI provided construction bonds for various APH projects and sold APH building materials for those projects. (Doc. # 13-1 ¶ 4--7.) As surety, PSI would receive funds from the lenders of the projects and would pay the amounts owed to the subcontractors and other material suppliers. (Id. ¶ 8.) According to PSI, APH became delinquent on several construction projects to which PSI had supplied materials. (Id. ¶ 11.)
Plaintiffs Timothy J. Fitzgerald ("Fitzgerald") and Gordon P.A. Smith ("Smith") (collectively, Plaintiffs) each entered into bonding agreements with PSI for the construction of their respective homes. ("FAC," Doc. # 56 ¶ 11; Docs. # 60-5; 60-6.) Plaintiffs allege that PSI misused the bonded funds for their projects by diverting some of the funds to pay invoices for unrelated projects. (FAC ¶¶ 24--26; 37, 42, 56; 77--78.)
Plaintiffs assert that as a result of PSI's actions, they had to advance their own funds to complete the construction of their respective projects. (FAC ¶¶ 57, 79.) Fitzgerald further alleged that the advancement of his funds resulted in him filing for Chapter XIII bankruptcy protection. (FAC ¶ 58.)
I. Fitzgerald's Vineyard Project
On August 27, 2007, Fitzgerald and Parsons,*fn1 who worked together at APH, entered into a construction contract ("Vineyard Construction Contract") with contractor Thomas A. Martin ("Martin") to build a "residence" at 2276 Vineyard Street, Wailuku, Hawaii ("Vineyard Project").*fn2 (Doc. # 69-2; "Fitzgerald Aff.," Doc. # 67-1 ¶ 4.) The Vineyard Construction Contract provided that Martin would pay for all material, labor, equipment and other necessary items to complete the Vineyard Project, and that Parsons and Fitzgerald would in return pay Martin $393,599.00. (Doc. # 69-2.) One of the general conditions of the contract was that Martin "furnish a performance and payment bond in an amount equal to one hundred percent (100%) of the contract price." (Id.)
On or about December 17, 2007, Fitzgerald, Parsons, Martin and PSI entered into a Uniform Performance Bond, Assignment of Contract and Agreement Bond ("Vineyard Bond"). (Doc. # 69-3.) On December 17, 2007, Fitzgerald and Parsons entered into a construction to mortgage contract with American Savings Bank.*fn3 (Doc. # 69-4.) Construction draws were funded to the PSI bonding account from the lender of the project. (FAC ¶ 15; Doc. # 13-1 ¶ 8.)
On February 18, 2009, Fitzgerald, along with Parsons and her husband, Dale Parsons, signed a Limited Agreement of Guaranty and Indemnity, guaranteeing payment of all credit extended by PSI to APH. (Doc. # 69-28.)
Plaintiffs allege that Defendants diverted Vineyard Project bonded funds to pay invoices for unrelated projects, and that during the construction, Mason, in his capacity as president of PSI, refused to pay a Request for Payment on the Vineyard Project. (FAC ¶¶ 22, 37, 51.) According to the FAC, this required Fitzgerald to pay for "any shortfall in the bond account if he wanted his home finished." (FAC ¶¶ 37, 51.) Plaintiffs allege that when construction was complete, Fitzgerald should have received unused money from the bond fund and expected to be reimbursed for "any advancement of his personal funds" to complete the project. (Id. ¶ 54.) Plaintiffs also allege that PSI made Fitzgerald "liable for falsified unpaid Vineyard Project invoices planted on an APH aging statement that were previously paid for." (Doc. # 68 at 10--11.) Plaintiffs further allege that Defendants falsified certain financial records and communications regarding the project bond statements, checks and invoices. (FAC ¶ 82.)
In the fall of 2009, Smith contacted APH and met with Parsons and Fitzgerald to discuss designing and supplying the building materials for Smith's home. ("Smith Aff.," Doc. # 67-2 ¶ 4.) On December 4, 2009, Smith and his wife (who is not a party in this action) contracted with APH to supply the materials and oversee the financial expenditures of the construction, including draws and payment disbursements. (Id. ¶ 11; Doc. # 67-9.) On the same day, the Smiths entered into a construction contract ("first Smith construction contract") with Lehua Management Services ("Lehua") and APH. (Doc. # 67-8.) Under the construction contract, in which Lehua was named contractor, the Smiths agreed to pay APH, and APH agreed to distribute, the funds for the project. (Id.) The contract also referenced the APH materials contract. (Id.) The total figure for the Smith Project was $430,000. (Doc. # 67-8.) According to Smith, the figure included $282,693 for labor provided by Lehua, a $38,307 contingency fund for some of the materials that Smith previously purchased, $106,850 for the APH building materials package, and $2,150 for an administrative fee to PSI for bonding. (Smith Aff. ¶ 9, 13.)
Lehua decided to use PSI for bonding the Smith Project. ("Parsons Aff.," Doc. # 67-3 ¶ 22.) According to Plaintiffs, on January 19, 2010, Mason informed Parsons by phone that he would not bond the Smith Project unless she rewrote the construction contract and removed references to APH. (Parsons Aff. ¶ 23.) On or about January 25, 2010, the Smiths entered into a new construction contract ("Smith Construction Contract") with Lehua only; the contract eliminated references to APH, including any reference to an APH materials contract. (Doc. # 67-11; Parsons Decl. Ex. 29.) The Smith Construction Contract states in part that "Owner hereby agrees to pay Contractor through Contractor's bonding entity, and Contractor's bonding entity agrees to distribute" the funds for the project. (Doc. # 67-11.)
Unlike the Vineyard Construction Contract, the Smith Construction Contract also contains a "contingency/allowance" provision that states:
The total construction cost includes an owner contingency/allowance fund of $32,565.00 for building materials as specified per the materials contract that Owner has agreed to supply. (Doc. # 56-34; Doc. # 69-34.) A January 29, 2010 Change Order by APH, which was approved by Smith, deleted certain kitchen materials and thus added $5,742.00 to the contingency amount, bringing the total amount allocated to contingency/allowance to $38,306.77. (Doc. # 60-8.) The $38,306.77 is included in the $430,000.00 contract price. ("Duvauchelle Decl," Doc. # 60-2 ¶ 11; Smith Aff. ¶ 13.)
On February 2, 2010, Smith, Lehua, and PSI signed a Uniform Performance Bond, Assignment of Contract and Agreement Bond ("Smith Bond") for the construction of a residence at 3076 Alaneo Place, Wailuku, Hawaii 96793 ("Smith Project"). (Doc. # 60-6.) PSI was the surety on the bond, and as the surety, received money from the project lender and disbursed funds to subcontractors. ("Mason Decl.," Doc. # 60-1 ¶ 3; Duvauchelle Decl. ¶ 8.)
Through January and February, APH continued to provide its services to Lehua and the Smiths. (Parsons Aff. ¶ 28.) On February 16, 2010, Parsons sent PSI a budget for the Smith Project that included $27,869 for APH. (Parsons Aff. ¶ 29; Doc. # 67-12.) On February 18, 2010, Parsons submitted a Request for Payment for $27,869-$25,774 of which was requested from the first construction draw. (Parsons Aff. ¶ 31.) On or about February 22, 2010, a construction draw from the bonded Smith construction loan in the amount of $180,600 was funded to PSI's bonding account. (Id. ¶ 63; Doc. # 69-36.) According to Plaintiffs, PSI informed Parsons that Mason would not release the funds Parsons requested. (Parsons Aff. ¶ 34.) According to Plaintiffs, Lehua began ordering materials directly from PSI. (Id. ¶ 64.)
On February 26, 2010, Mason sent Parsons an email stating: "We are applying the funds due APH from the Smith job, $25,774.00, as an offset against your account to Pacific Source." (Doc. # 69-39.) PSI has stated that it received funds from the lender for Smith's project, a portion of which otherwise would be due to APH, but that it applied those funds as an offset against the outstanding debt APH owed PSI on a different construction project. (Doc. # 13-1 ¶ 11.)
In a March 9, 2010 bonding statement, PSI listed a $106,850 "APH Material Package" and indicated that PSI paid $30,537.83 of that total. (Doc. # 69-38.) Plaintiffs contend this was a false statement because APH was no longer supplying services to Smith and the funds extracted were not applied to the Alaneo Project. (FAC ¶¶ 72--73.)
Plaintiffs also allege that on April 6, 2010, PSI used Smith's funds to pay off Vineyard Project invoices that were improperly added to the APH aging statement. Plaintiffs further assert that as a result, Smith had to advance $33,437.55 of his own funds to complete the construction of his home. (FAC ¶ 79.)
On February 22, 2011, APH, Smith, Parsons, Dale Parsons, and Fitzgerald filed a Complaint against PSI and Mason. (Doc. # 1.) The Complaint alleged a violation of the Equal Opportunity Act; debt collection violations; intent to defraud; breach of contract; breach of good faith and fair dealing; promissory estoppel; tortious interference with contractual relations; conversion; unjust enrichment; breach of fiduciary duty; intentional and/or negligent misrepresentation; malicious, wanton and intentional actions; and violation of Haw. Rev. Stat. chapter 480. (Id.) On April 18, 2011, Defendants filed a Motion to Dismiss the Complaint. (Doc. # 13.) On July 5, 2011, the Plaintiffs filed an opposition to the Motion to Dismiss. (Doc. # 32.) On November 21, 2011, Defendants filed a Reply, stating that they have entered into settlement agreements with bankruptcy trustees on behalf of the estates of APH and the Parsons, thereby releasing APH's and the Parsons' claims against Defendants. (Id. at 13, 15.)
At the December 5, 2011 hearing on the Motion to Dismiss, the Court was informed that the claims between Defendants and the Parsons and APH were released, and that the only claims remaining were that of Smith and Fitzgerald. Plaintiffs recently retained counsel Arnold Phillips, Esq., who made an oral motion to file an amended complaint. On December 6, 2011, the Court granted plaintiffs Smith and Fitzgerald leave to amend and denied Defendants' Motion to Dismiss without prejudice. (Doc. # 48.)
On December 23, 2011, APH and Defendants filed a Stipulation for Dismissal of Complaint with Prejudice as to Plaintiff Aloha Package Homes LLC. (Doc. # 53.) Also on December 23, 2011, Defendants and the Parsons filed a Stipulation for Dismissal of Complaint with Prejudice as to Plaintiffs Virginia Parsons and Dale J. Parsons, Jr. (Doc. # 54.)
On January 19, 2012, Plaintiffs filed the present First Amended Complaint ("FAC") against PSI and Mason. ("FAC," Doc. # 56.) The FAC alleges the following three claims: (1) Fraud (Id. ¶¶ 80--85); (2) Breach of Contract (Id. ¶¶ 86--89); and (3) Violation of HRS Chapter 480 (Id. ¶¶ 90--94).
On March 5, 2012, Defendants filed the instant Motion to Dismiss First Amended Complaint, or, In the Alternative, For Summary Judgment. ("Mot.," Doc. # 59.) Defendants also filed a Concise Statement in Support of its Motion. ("Def's CSOF," Doc. # 60.) Also on March 5, 2012, Defendants filed an Ex Parte Motion to Strike Declaration of Arnold Theilens [sic] Phillips II, Dated January 19, 2012 ("Motion to Strike"). ("Mot. to Strike," Doc. # 62.)
On March 28, 2012, Plaintiffs filed an Opposition to Defendants' Motion to Dismiss ("Opposition"). ("Opp'n," Doc. # 67.) Plaintiffs also filed a Concise Statement in Opposition. ("Pls' CSOF," Doc. # 68.) Also on March 28, 2012, Plaintiffs filed a Declaration of Virginia Parsons. (Doc. # 69.) Attached to the Virginia Parsons Declaration are the same exhibits attached to Phillips' Declaration and the FAC. (See Doc. # 69 Exhs. 1--35.)
On April 4, 2012, Defendants filed a Reply in support of their Motion to Dismiss ("Reply," Doc. # 72), and a Reply in support of their Ex Parte Motion to Strike (Doc. # 73).
I. Federal Rule of Civil Procedure 12(b)(6)
Pursuant to Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss will be granted where the plaintiff fails to state a claim upon which relief can be granted. Review is limited to the contents of the complaint. See Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir. 1994). A complaint may be dismissed as a matter of law for one of two reasons: "(1) lack of a cognizable legal theory, or (2) insufficient facts under a cognizable legal claim." Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984) (citation omitted). Allegations of fact in the complaint must be taken as true and construed in the light most favorable to the plaintiff. See Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir. 2005).
A complaint need not include detailed facts to survive a Rule 12(b)(6) motion to dismiss. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555--56 (2007).
In providing grounds for relief, however, a plaintiff must do more than recite the formulaic elements of a cause of action. See id. at 556--57; see also McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir. 1988) ("[C]onclusory allegations without more are insufficient to defeat a motion to dismiss for failure to state a claim.") (citation omitted). "The tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions," and courts "are not bound to accept as true a legal conclusion couched as a factual allegation." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (internal quotations and citations omitted). Thus, "bare assertions amounting to nothing more than a formulaic recitation of the elements" of a claim "are not entitled to an assumption of truth." Moss v. U.S. Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) ("[T]he non-conclusory 'factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.") (internal quotations and citations omitted).
A court looks at whether the facts in the complaint sufficiently state a "plausible" ground for relief. See Twombly, 550 U.S. at 570. A plaintiff must include enough facts to raise a reasonable expectation that discovery will reveal evidence and may not just provide a speculation of a right to relief. Id. at 586. When a complaint fails to adequately state a claim, such deficiency should be "exposed at the point of minimum expenditure of time and money by the parties and the court." Id. at 558 (citation omitted). If a court dismisses the complaint or portions thereof, it must consider whether to grant leave to amend. Lopez v. Smith, 203 F .3d 1122, 1130 (9th Cir. ...