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Mansha Consulting LLC v. Alakai

United States District Court, D. Hawaii

August 23, 2017

MANSHA CONSULTING LLC, Plaintiff,
v.
CLIFF ALAKAI, et al., Defendants.

         ORDER GRANTING DEFENDANT TOM MATSUDA'S MOTION TO DISMISS FIRST AMENDED COMPLAINT FILED MARCH 17, 2017, DEFENDANT CLIFF ALAKAI'S PRE-ANSWER MOTION TO DISMISS FIRST AMENDED COMPLAINT FILED ON MARCH 17, 2017, AND DEFENDANT JEFFREY KISSEL'S SUBSTANTIVE JOINDER TO DEFENDANT MATSUDA'S AND DEFENDANT ALAKAI'S MOTIONS TO DISMISS FIRST AMENDED COMPLAINT FILED ON MARCH 17, 2017

          Alan C. Kay, United States District Judge

         For the reasons set forth below, the Court GRANTS Defendant Tom Matsuda's Motion to Dismiss First Amended Complaint Filed March 17, 2017 (ECF No. 37), Defendant Cliff Alakai's Pre-Answer Motion to Dismiss First Amended Complaint Filed on March 17, 2017 (ECF No. 40), and Defendant Jeffrey Kissel's Substantive Joinder to Defendant Tom Matsuda's Motion to Dismiss First Amended Complaint Filed March 17, 2017 and to Defendant Cliff Alakai's Pre-Answer Motion to Dismiss the First Amended Complaint Filed on March 17, 2017 (ECF No. 41). The Court dismisses all counts in the First Amended Complaint WITH PREJUDICE, and Plaintiff's First Amended Complaint is hereby DISMISSED.

         FACTUAL BACKGROUND

         In 2010, the Affordable Care Act (“ACA”) required states to establish health exchanges to facilitate, for individuals and entities, the selection, purchase, and enrollment in private health insurance plans. First Amended Complaint (“FAC”) ¶ 11, ECF No. 36. As a result, the State of Hawaii established the Hawaii Health Connector (“HHC” or the “Connector”), the State's health insurance exchange. Id. ¶ 12. To assist with its obligations, and in particular, to implement necessary information technology programs and systems, HHC retained Plaintiff Mansha Consulting, LLC (“Mansha” or “Plaintiff”). Id. ¶¶ 10, 14, 15.

         Mansha entered into a contract with HHC (the “IPMO Contract”) which totaled over 21 million dollars. Id. ¶ 15. The IPMO Contract was funded through grants from the federal government, and accordingly, payment to Mansha was to be supplied by the Centers for Medicare and Medicaid Services (“CMS”), the responsible federal agency. Id. ¶ 16.

         Mansha began work under the IPMO contract on or around April 2013. Id. ¶ 17. Beginning with the invoice dated September 1, 2014 and thereafter, HHC failed to forward Mansha's invoices for payment. Id. ¶ 18. Following several months of unpaid invoices, each of which was in the amount of $677, 842.61 plus excise taxes, Mansha on or around December of 2014, ceased further work under the IPMO Contract. Id. ¶ 19. From July 2014 to December 2014, Mansha continued its work under the contract based on statements and acts by the Defendants, who were directors and/or officers of HHC, that payment would be made to Mansha based on its invoices and erroneous reasons for nonpayment. Id. ¶¶ 5-7, 19.

         Eventually, HHC collapsed. Id. ¶ 20. Since HHC's collapse, Mansha has attempted to recover its losses by demanding compensation from HHC directly, retaining Counsel to address the matter with HHC, contacting CMS directly, and communicating with other relevant third parties. Id.

         In relation to Defendants' actions in mishandling the invoice payments, Mansha alleges negligent misrepresentation, negligence, and breach of fiduciary duty claims against Defendants Tom Matsuda (“Matsuda”) and Jeffrey Kissel (“Kissel”) and a breach of fiduciary duty claim against Defendant Cliff Alakai (“Alakai”). Id. ¶¶ 22, 27, 32. As a result of these actions, Mansha claims, inter alia, that its value as a company has been diminished, a pending acquisition of Mansha was derailed, and that it has lost millions of dollars. Id. ¶¶ 25, 30, 42.

         The FAC contains the following allegations against each of the Defendants.

         Plaintiff only alleges a claim for breach of fiduciary duty against Defendant Alakai. Id. ¶ 32. Defendant Alakai was a member of the Board of Directors for HHC during the relevant time period and at some point might have served as a treasurer for the Board of Directors.[1] Id. ¶ 33.[2] Alakai knew or should have known that HHC became insolvent and had a duty to Mansha to, inter alia, avoid any actions that unduly risked assets which could be used to pay Mansha's claim. Id. ¶¶ 39-40. Mansha alleges that Alakai refused to forward Mansha's invoices for payment by CMS. Id. ¶ 40. Mansha alleges that because of this conduct Alakai was grossly negligent in carrying out his fiduciary duties to Mansha and breached his fiduciary duty to Mansha. Id. ¶¶ 41-42.

         Plaintiff alleges negligent misrepresentation, negligence, and breach of fiduciary duty claims against Defendant Matsuda. Id. ¶¶ 22, 27, 32. Defendant Matsuda was the Interim Executive Director of HHC “from a date unknown” until approximately October 2014. Id. ¶ 23a. Matsuda was responsible for HHC's overall administration. Id. ¶ 23b.

         As the basis for Plaintiff's negligent misrepresentation claim, Mansha alleges that Matsuda negligently misinformed Mansha that the invoices were not being forwarded to CMS because there was a restriction on funds initiated by either CMS or HHC. Id. ¶¶ 23d-e. Mansha later learned that although such a restriction may have existed for a short period of time, the restrictions had been cleared and its invoices could have been paid. Id. ¶ 23e. Matsuda also made erroneous assurances to Mansha that it would be paid on its submitted invoices, in effect urging Mansha to “hang in there.” Id. ¶ 23f. As a result of this misinformation, Mansha forwent action which it otherwise would have taken and which could have prevented damage to Mansha. Id. ¶ 23g. Plaintiff further alleges that the duty owed by Matsuda to Mansha is imposed by Restatement (Second) of Torts § 552 to exercise reasonable care in obtaining or communicating information for the guidance of others in their business transactions. Id. ¶ 23j.

         As the basis for its negligence claim against Matsuda, Plaintiff alleges that Matsuda owed Mansha a duty to take reasonable steps to prevent damage to Mansha which could foreseeably result from these negligent misrepresentations. Id. ¶¶ 28h-i. Because Matsuda failed to take any such action, he breached his duty to Mansha. Id. For its breach of fiduciary duty claim against Matsuda, Plaintiff makes the same allegations as it does against Defendant Alakai. Id. ¶¶ 39-42.

         Plaintiff alleges negligent misrepresentation, negligence, and breach of fiduciary duty claims against Defendant Kissel. Id. ¶¶ 22, 27, 32. Defendant Kissel was HHC's Executive Director starting in October 2014 and was responsible for HHC's overall administration. Id. ¶¶ 24a-b. Plaintiff's claims against Kissel are substantially the same as Plaintiff's claims against Matsuda. See id. ¶¶ 24b-k, 29b-i, 39-42.

         PROCEDURAL BACKGROUND

         Plaintiff filed a Complaint against Defendants on October 28, 2016. ECF No. 1. The Complaint raised claims for negligence and negligent breach of fiduciary duty against all Defendants.[3] Id. On December 5, 2016, Matsuda filed a Motion to Dismiss Complaint Filed October 28, 2016. ECF No. 12. Mansha filed its Opposition on December 30, 2016. ECF No. 19. Alakai and Kissel filed a Non-Substantive Joinder to Matsuda's Motion to Dismiss on December 30, 2016. ECF No. 21. Matsuda filed a Reply on January 20, 2017. ECF No. 26. On December 30, 2016, Alakai and Kissel also filed a Pre-Answer Motion to Dismiss Complaint Filed on October 28, 2016. ECF No. 20. Plaintiff filed its Opposition on January 13, 2017. ECF No. 25. Alakai and Kissel filed a Reply on January 20, 2017. ECF Nos. 27-28. On January 20, 2017 Matsuda filed a Non-Substantive Joinder to Defendants Alakai and Kissel's Reply. ECF No. 29. The Court held a hearing on both motions to dismiss on February 2, 2017. On February 16, 2017, the Court entered an Order granting Defendants' motions to dismiss the Complaint without prejudice (“February 16, 2017 Order”). ECF No. 34.

         On March 17, 2017, Plaintiff filed its First Amended Complaint, alleging claims for negligent misrepresentation, negligence, and breach of fiduciary duty. ECF No. 36. As previously discussed, Plaintiff alleges all of these claims against Defendants Matsuda and Kissel but only breach of fiduciary duty against Defendant Alakai. Id.

         On March 31, 2017, Defendant Matusda filed a Motion to Dismiss First Amended Complaint Filed March 17, 2017 (“Matsuda Motion”). ECF No. 37. On April 6, 2017, Defendant Alakai filed a Pre-Answer Motion to Dismiss First Amended Complaint Filed on March 17, 2017 (“Alakai Motion”). ECF No. 40. On that same date, Defendant Kissel filed a Substantive Joinder to Defendant Matsuda's Motion to Dismiss First Amended Complaint Filed March 17, 2017 and to Defendant Cliff Alakai's Pre-Answer Motion to Dismiss First Amended Complaint Filed on March 17, 2017 (“Kissel Joinder”). ECF No. 41.

         On July 13, 2017, Plaintiff filed oppositions to Defendants' Motions and Kissel's Joinder (“Pl. Alakai Opp.” and “Pl. Matusda Opp.”). ECF Nos. 45, 46. On July 20, 2017, Defendants Matsuda and Alakai filed replies (“Matsuda Reply” and “Alakai Reply”) to Plaintiff's oppositions. ECF Nos. 48, 50. Defendant Kissel also filed a reply in further support of his Joinder (“Kissel Reply”). ECF No. 49. The Court held a hearing on these Motions on August 3, 2017.[4]

         STANDARD

         Federal Rule of Civil Procedure 12(b)(6) authorizes the Court to dismiss a complaint that fails “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). Rule 12(b)(6) is read in conjunction with Rule 8(a), which requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). The Court may dismiss a complaint either because it lacks a cognizable legal theory or because it lacks sufficient factual allegations to support a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988).

         In resolving a Rule 12(b)(6) motion, the Court must construe the complaint in the light most favorable to the plaintiff and accept all well-pleaded factual allegations as true. Sateriale v. R.J. Reynolds Tobacco Co., 697 F.3d 777, 783 (9th Cir. 2012). The complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “The plausibility standard . . . asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.'” Id. (quoting Twombly, 550 U.S. at 557).

         When the Court dismisses a complaint pursuant to Rule 12(b)(6) it should grant leave to amend unless the pleading cannot be cured by new factual allegations. OSU Student All. v. Ray, 699 F.3d 1053, 1079 (9th Cir. 2012).

         DISCUSSION

         I. Count I: Negligent Misrepresentation

         a. Whether Mansha's Negligent Misrepresentation Claim Must Be Dismissed Pursuant to the Court's February 16, 2017 Order

         Defendants Matsuda and Kissel argue that Mansha's negligent misrepresentation claim must be dismissed pursuant to the law of the case. The Court's February 16, 2017 Order held:

[T]he allegations in the Complaint involve duties owed by Defendants to HHC or duties that-if the Defendants had at all-arose from the contract between HHC and Mansha.
. . .
Moreover, the negligent conduct alleged invokes duties that would only arise from the contract between HHC and Mansha. Mansha essentially claims that . . . Defendants Matsuda and Kissel negligently misinformed Mansha about the reasons for delay and the status of the payments, leading to additional damages. See Compl. ¶¶ 26-28. These allegations involve HHC's alleged failure to perform on the contract, i.e., its failure to pay Mansha for its work. They do not involve violations of any duty independently recognized by Hawaii tort law. See Francis, 971 P.2d at 708. As in Bernstein, Mansha has “failed to establish any cognizable duty under [Hawaii] law apart from and independent of [HHC's] contractual promises.” 827 F.2d at 482; see also Kelomar, 413 Fed.Appx. at 982-83 (“A person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations.” (quoting Aas v. Superior Court, 12 P.3d 1125, 1135 (Cal. 2000)).

         February 16, 2017 Order at 14-16. In addition, the Court's February 16, 2017 Order specifically held that affirmative representations that Mansha would be paid did not give rise to a tort claim:

Mansha attempts to argue that its allegations that Defendants . . . made affirmative representations that Mansha would be paid involved a duty independent from the contract between Mansha and HHC. However, this claim attempts to “turn[] a promise to perform into a statement of fact so that failure to perform automatically shows a misrepresentation of intention to perform.” Catamount Radiology, P.C. v. Bailey, No. 1:14-CV-213, 2015 WL 3795028, at *14 (D. Vt. June 18, 2015) (quoting Howard v. Usiak, 775 A.2d 909, 913 (Vt. 2001)). As noted by the Vermont Supreme Court in Howard v. Usiak, if such a promise to perform were actionable in tort, “any breach of contract would be misrepresentation so that negligent breach would be a tort.” 775 A.2d at 913. The court in Howard recognized “the need to keep tort and contract theories separate so that negligence concepts do not overrun the limitations on contractual rights and remedies.” Id. The same concerns were outlined by the Hawaii Supreme Court in Francis, and are applicable here.

February 16, 2017 Order at 17.[5]

         The FAC's allegations in the negligent misrepresentation claim are substantively the same as those in the original complaint's negligence claim. The only major difference between these claims is that Mansha alleges that the duty owed by Defendants to Mansha is imposed by Restatement (Second) of Torts § 552 to exercise reasonable care or competence in obtaining or communicating information for the guidance of others in their business transactions. FAC ¶¶ 23j, 24j (citing State of Hawaii ex rel. Bronster v. U.S. Steel Corp., 82 Haw. 32, 41, 919 P.2d 294, 303 (1996)).[6] Therefore, pursuant to the law of the case, which held that the conduct alleged invokes duties that would only arise from the contract between HHC and Mansha, Count I of the FAC must be dismissed because it fails to allege any additional conduct that would give rise to an independent duty in tort.

         The Court finds no basis to depart from the law of the case on this issue. Under the law of the case doctrine, “a court is generally precluded from reconsidering an issue that has already been decided by the same court, or a higher court in the identical case.” Thomas v. Bible, 983 F.2d 152, 154 (9th Cir. 1993). A court may have discretion to depart from the law of the case where: (1) the first decision was clearly erroneous; (2) an intervening change in the law has occurred; (3) the evidence on remand is substantially different; (4) other changed circumstances exist; or (5) a manifest injustice would otherwise result. United States v. Alexander, 106 F.3d 874, 876 (9th Cir. 1997). Failure to apply the doctrine of the law of the case absent one of the requisite conditions constitutes an abuse of discretion. Thomas, 983 F.2d at 155.

         Throughout its opposition, Mansha argues that this case gives rise to independent tort duties rather than contract duties. Specifically, Mansha argues that at the time of the alleged negligent misrepresentations HHC was in breach of the contract and any work Mansha continued to perform was extra-contractual because Mansha was no longer obligated to perform due to the contract breach. See Pl. Matsuda Opp. at 18-20, 25-26. The Court finds this argument problematic for several reasons. First, despite Mansha's argument that it was not performing under the contract after HHC's breach, Mansha's FAC alleges just the opposite-“MANSHA only continued work under the IPMO contract as a direct result of various negligent misrepresentations by Defendants.” FAC ¶ 18 (emphasis added); see also id. ¶ 19 (“MANSHA continued to work under the IPMO Contract based on reasonable reliance upon various negligent statements and acts by Defendants . . .”). The FAC, therefore, alleges that Mansha continued to work under the contract and not that its work was extra-contractual.

         Second, Mansha's FAC only alleges that Mansha was “faced with a seeming breach by the Connector” but fails to allege that HHC in fact breached the contract and that Mansha was no longer obligated to perform under it. Id. ¶ 23h. Third, Mansha's argument assumes that a breach by a party to a contract necessarily cancels the contract. However, a breach by a party to a contract does not always cancel the contract. See 23 Williston on Contracts § 63:3 (4th ed.); 17A Am. Jur. 2d Contracts § 549. Generally, if the breach is material, the non-breaching party may have grounds to cancel the contract. See id. If, on the other hand, the breach is partial, the non-breaching party's remedy is for damages, and the non-breaching party is still bound by the contract and may not abandon performance. See id. Mansha has failed to allege that there was a breach that would serve as a basis for cancelling the contract. As previously discussed, Mansha's FAC does not allege that the contract was breached let alone cancelled.

         Accordingly, the Court finds no basis to depart from the law of the case and dismisses Count I with prejudice.

         b. Whether the Economic Loss Rule Bars Mansha's Negligent Misrepresentation Claim

         The Court also finds that the economic loss rule bars Mansha's negligent misrepresentation claim. Hawaii recognizes the economic loss rule, which precludes recovery in tort for purely economic damages. Commerce & Indus. Ins. Co. v. Watts Water Techs., Inc., No. 15-00324 HG-KJM, 2016 WL 6471247, at *4 (D. Haw. Oct. 31, 2016). It “marks the fundamental boundary between the law of contracts, which is designed to enforce expectations created by agreement, and the law of torts, which is designed to protect citizens and their property by imposing a duty of reasonable care on others.” Leis Family Ltd. P'ship v. Silversword Eng'g, 126 Haw. 532, 535, 273 P.3d 1218, 1221 (Haw. Ct. App. 2012) (internal quotation marks and citation omitted). These tort standards are imposed by society, without regard to any agreement. The doctrine “was designed to prevent disproportionate liability and allow parties to allocate risk by contract.” Id. (internal quotation marks and citation omitted). “Hawai‘i law will not allow tort recovery in the absence of conduct that (1) violates a duty that is independently recognized by principles of tort law and (2) transcends the breach of the contract.” Francis v. Lee Enters., Inc., 89 Haw. 234, 235, 971 P.2d 707, 708 (1999).

         In Maui Elec. Co. v. Chromalloy Gas Turbine, LLC, No. CIV. 12-00486 SOM, 2015 WL 1442961, at *12-16 (D. Haw. Mar. 27, 2015), the court analyzed Hawaii case law on whether the economic loss rule bars a claim for negligent misrepresentation. The court held, “As this court reads those cases, the contractually based negligent misrepresentation claims are barred, but [those not based on contractual obligations] survive.” Id. at *13; compare State of Hawaii ex rel. Bronster v. U.S. Steel Corp., 82 Haw. 32, 40, 919 P.2d 294, 302 (1996) (holding that the tort of negligent misrepresentation was not precluded by the economic loss doctrine), with City Exp., Inc. v. Express Partners, 87 Haw. 466, 469-70, 959 P.2d 836, 839-40 (1998) (distinguishing U.S. Steel and holding that in the context of construction litigation a tort action for negligent misrepresentation alleging damages purely based on economic loss is not available to a party in privity of contract with a design professional).[7]

         The Court finds this analysis persuasive, especially in light of the previously discussed Hawaii rule that tort recovery is not allowed in the absence of conduct that violates a duty that is independently recognized by tort law and transcends the breach of the contract.[8] As previously discussed and pursuant to the February 16, 2017 Order, the alleged misrepresentations here are contract-based because they relate to whether HHC was able to perform under its contract with Mansha. The allegations here do not relate to misrepresentations outside of the contract and do not transcend a breach of contract action. The damages alleged also do not relate to any specific harm arising from the alleged misrepresentations that would not also exist from a breach of contract claim.

         Again, Mansha argues that because Defendants in this case already breached the contract at the time of the negligent misrepresentation, the duty that Defendants owed to Mansha was extra-contractual. Pl. Matsuda Opp. at 25. For the reasons previously discussed, the Court does not find this argument persuasive. Accordingly, the Court also dismisses Count I because it is barred by the economic loss rule.[9]

         II. Count II: Negligence

         a. Whether Mansha Pleads a ...


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