Opinion
NO. CIV. S-08-209 LKK/JFM.
June 4, 2008
ORDER
Plaintiff Gulf Insurance has brought suit against defendant First Bank alleging that defendant has wrongfully refused to disburse funds it agreed to set aside for plaintiff. Plaintiff has brought claims for breach of contract, conversion, breach of fiduciary duty, and subrogation. Pending before the court are defendant's motions to dismiss. For the reasons explained below, the motions are granted in part and denied in part, and leave to amend is granted.
I. Background
The "background" is derived from the plaintiff's complaint, the allegations of which must be taken as true for disposition of the instant motion.
Baldwin Ranch subsequently defaulted on certain performance and payment obligations. FAC ¶ 19. Gulf Insurance alleges that it is now entitled to the undisbursed balance of the set aside funds. FAC ¶ 22. On September 26, 2007, Gulf Insurance requested that First Bank provide an accounting of all accounts and loans for Baldwin Ranch. FAC ¶ 25. As of April 21, 2008 (the date of the first amended complaint's filing), Gulf Insurance had not received an accounting or disbursement from First Bank. FAC ¶ 26.
Pending before the court are First Bank's motions to dismiss, which seek to dismiss the claims for conversion, breach of fiduciary duty, subrogation, and declaratory relief. Defendant does not seek dismissal of the breach of contract claim. Plaintiff has also abandoned its initial claim for punitive damages in the first amended complaint.
After the first motion to dismiss was filed, plaintiff added a claim for subrogation. Defendant then filed a second motion to dismiss directed toward the subrogation claim.
II. Standard
In order to survive a motion to dismiss for failure to state a claim, plaintiffs must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, ___ U.S. ___, 127 S. Ct. 1955, 1974 (2007). While a complaint need not plead "detailed factual allegations," the factual allegations it does include "must be enough to raise a right to relief above the speculative level." Id. at 1964-65.
The Supreme Court recently held that Federal Rule of Civil Procedure 8(a)(2) requires a "showing" that the plaintiff is entitled to relief, "rather than a blanket assertion" of entitlement to relief. Id. at 1965 n. 3. Though such assertions may provide a defendant with the requisite "fair notice" of the nature of a plaintiff's claim, the Court opined that only factual allegations can clarify the "grounds" on which that claim rests.Id. "The pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action." Id. at 1965, quoting 5 C. Wright A. Miller, Federal Practice and Procedure, § 1216, pp. 235-36 (3d ed. 2004).
The holding in Twombly explicitly abrogates the well established holding in Conley v. Gibson that, "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." 355 U.S. 41, 45-46 (1957); Twombly, 127 S. Ct. at 1968.
On a motion to dismiss, the allegations of the complaint must be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972). The court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. See Retail Clerks Int'l Ass'n v. Schermerhorn, 373 U.S. 746, 753 n. 6 (1963). In general, the complaint is construed favorably to the pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Harlow v. Fitzgerald, 457 U.S. 800 (1982). Nevertheless, the court does not accept as true unreasonable inferences or conclusory legal allegations cast in the form of factual allegations. W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).
III. Analysis
A. Conversion
A cause of action for conversion requires "(1) the plaintiff's ownership or right to possession of the property; (2) the defendant's conversion by a wrongful act or disposition of property rights; and (3) damages." Burlesci v. Petersen, 68 Cal. App. 4th 1062, 1066 (1998).
A generalized claim for money is not actionable as conversion.Vu v. Cal. Commerce Club, 58 Cal. App. 4th 229, 235 (1997); see also Farmers Ins. Exch. v. Zerin, 53 Cal. App. 4th 445, 452 (1997) ("a mere contractual right of payment, without more, will not suffice"); accord In re Bailey, 197 F.3d 997, 1000 (9th Cir. 1999). If, however, "there is a specific, identifiable sum involved, such as where an agent accepts a sum of money to be paid to another and fails to make the payment," a cause of action for conversion exists. Burlesci, 68 Cal. App. 4th at 1066; see also Fischer v. Machado, 50 Cal. App. 4th 1069, 1072-73 (1996). In other words, "money can only be treated as specific property subject to being converted when it is 'identified as a specific thing.'" PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil, Shapiro, LLP, 150 Cal. App. 4th 384, 395 (2007) (quotingBaxter v. King, 81 Cal. App. 192, 194 (1927)). That said, it is not necessary that "each coin or bill be earmarked." Haigler v. Donnelly, 18 Cal. 2d 674, 681 (1941).
Here, First Bank argues that the "undisbursed balance of loan funds" sought by plaintiff, FAC ¶ 43, does not constitute a specific, identifiable sum because Baldwin Ranch was never entitled to receive the full amount of its loan in a lump sum. Instead, as noted in the set aside letter, Baldwin Ranch was only allowed to draw down funds periodically, subject to the satisfactory completion of work. FAC, Ex. 2 ("Lender will make disbursement from the set aside allocation from time to time upon the written authorization of the Borrower . . . for construction of the bonded improvements . . . but only after Lender is satisfied that the work paid for has actually been performed."). Thus, First Bank reasons that "[u]ntil these loan amounts are draw upon and actually disbursed, there is nothing that specifically identifies the undisbursed sums." Mot. at 13.
The argument is unavailing. The set aside letter provided that First Bank would "allocate and set aside in the disbursement budget the sum of not less than $7,759,521." FAC, Ex. 2. That fixed amount, less money already disbursed, constitutes the "undisbursed balance of the loan funds" — a sum that is both specific and identifiable.
It is immaterial whether the funds at issue were in fact segregated; otherwise, defendants could shield themselves from liability by simply commingling funds. Instead, the issue is whether First Bank had an obligation to segregate the funds or to take similar action. Here, under the terms of the agreement, First Bank agreed to "allocate and set aside" the funds, which indicates that they were not to be treated as any other funds in the bank's possession, even if there was no express requirement of segregation.
First Bank's argument appears to conflate its relationship to Baldwin Ranch with its relationship to Gulf Insurance. But Gulf Insurance's entitlement to the undisbursed funds is not contingent upon the procedures for disbursements to Baldwin Ranch. Instead, that entitlement is contingent upon only one condition: whether Baldwin Ranch "fails to complete or pay for the improvement." FAC, Ex. 2. As alleged in the complaint, that condition has been met, and it therefore triggered Gulf Insurance's ownership interest in the undisbursed funds.
The facts here are similar to those in Travelers Casualty and Surety Co. of America v. RBC Centura Bank, No. 08-369 GEB/EFB, 2008 WL 1925017 (E.D. Cal. Apr. 28, 2008). There, the surety on an improvement bond sued the bank with which it had entered into a set aside agreement. As here, the set aside agreement provided that if the borrower on the original loan (i.e., the developers of the construction projects) "failed to complete or pay for the [i]mprovements, then [the bank] would make available for disbursement to Plaintiff the balance of the Set Aside Funds."Id. at *1. The borrower then defaulted, but the bank refused to pay. Under those facts, the court found that plaintiff had sufficiently stated a cause of action for conversion.
Here, too, Gulf Insurance has sufficiently stated a cause of action of conversion. It has identified a specific sum of money in which it has an alleged ownership interest — not merely a contractual right of payment. Accordingly, the court denies the motion to dismiss with respect to conversion.
B. Breach of Fiduciary Duty
The elements for a cause of action for breach of fiduciary duty are the existence of a fiduciary duty, the breach of that duty, and damages proximately caused by the breach. Mosier v. S. Cal. Physicians Ins. Exch., 63 Cal. App. 4th 1022, 1044 (1998). Whether a fiduciary duty exists is a question of law, whereas whether a breach has occurred is a question of fact. Amtower v. Photon Dynamics, Inc., 158 Cal. App. 4th 1582, 1599 (2008).
Here, First Bank argues that no fiduciary duty existed. A fiduciary duty can be created by agreement or by special circumstances. See Comm. on Children's Television, Inc. v. Gen. Foods Corp., 35 Cal. 3d 197, 221 (1983) ("[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law."). The bank argues that, at most, it owed a debt to Gulf Insurance, just as it owes a debt to anyone who deposits money into the bank. It is well-settled that the mere act of depositing money into a bank does not generally create fiduciary relationship. See Copesky v. Superior Court, 229 Cal. App. 3d 678, 692 (1991) ("[T]he relationship between a bank and its depositor is not a fiduciary relationship, but that of debtor-creditor"); see also Price v. Wells Fargo Bank, 213 Cal. App. 3d 465, 476 (1989) ("A debt is not a trust and there is not a fiduciary relation between debtor and creditor as such. . . .") (internal quotation marks omitted).
That said, it is also well-settled that an escrow agent owes a fiduciary duty to the parties to the escrow. Virtanen v. O'Connell, 140 Cal. App. 4th 688, 702-03 (2006) ("[I]t is hard to imagine how one can seriously dispute that an escrow holder owes a fiduciary duty to the parties to the escrow, including the party who has deposited property into the escrow."). Although First Bank was not an escrow agent as such, it could be argued that it performed a similar function in that it was bound to deliver funds to Gulf Insurance (at least upon a triggering event, i.e., Baldwin Ranch's default of its obligations).
The court concludes, however, that the relationship between First Bank and Gulf Insurance is not one that merits protection by the law of fiduciaries. It is noteworthy that the parties here are two sophisticated businesses with substantial bargaining power. See City of Hope Nat'l Med. Ctr. v. Genentech, Inc., 75 Cal. Rptr. 3d 333, 345 (2008). Had the parties desired to enter into a fiduciary relationship explicit, they could have expressly done so in the set aside letter. Further, while Gulf Insurance argues that it lacks knowledge and control over the disbursement budget as compared to First Bank, the balance of the disbursement budget can be identified by verifying the amount of funds already received by Baldwin Ranch.
Fiduciary obligations "generally come into play when one party's vulnerability is so substantial as to give rise to equitable concerns underlying the protection afforded by the law governing fiduciaries." Id. Here, the court cannot conclude that Gulf Insurance's vulnerability in its relationship with First Bank was so substantial to warrant such protection. See Reyes v. Atlantic Richfield Co., 12 F.3d 1464, 1472 (9th Cir. 1993) (refusing to impose fiduciary duty where there was nothing to indicate that the relationship was "anything other than an arms-length business transaction"); First Citizens Fed. Sav. Loan Ass'n v. Worthen Bank and Trust Co., N.A., 919 F.2d 510, 514 (9th Cir. 1990) ("Banks and savings institutions engaged in commercial transactions normally deal with one another at arm's length and not as fiduciaries."); Copesky, 229 Cal. App. 3d at 691. Accordingly, the court dismisses the breach of fiduciary duty claim.
C. Subrogation
Gulf Insurance also alleges a claim for subrogation on behalf of subcontractors and other labor, equipment, and material suppliers who worked on the improvements. "In general terms, subrogation is the substitution of one party in place of another with reference to a lawful claim, demand or right. It is a derivative right, acquired by satisfaction of the loss or claim that a third party has against another." In re Hamada, 291 F.3d 645, 649 (9th Cir. 2002). A subrogation claim requires that the plaintiff (1) have paid a debt owed to the subrogee in order to protect plaintiff's own interest, (2) not have acted as a volunteer, (3) not be primarily liable for debt, (4) have paid the entire debt, and (5) show that subrogation would not work an injustice to the rights of others. Id. at 651.
Because of the derivative nature of subrogation, Gulf Insurance must first allege facts sufficient to support a finding that the subcontractors had a valid claim against First Bank. As Gulf Insurance notes, a construction lender such as First Bank may be liable to a subcontractor if, for example, a stop notice or mechanics' lien is filed. See Nat'l Technican Systems v. Commercial Contractors, Inc., 89 Cal. App. 3d 1000, 1006 (2001) ("A 'stop notice' is a remedy to reach unexpended construction funds in the hands of the owner or lender, is available on both public and private works, and may be served by a claimant other than an original contractor."); N. Bay Constr., Inc. v. City of Petaluma, 143 Cal. App. 4th 552, 555 (2006) (mechanics' lien permits those who have provided labor or materials in connection with property to impose lien on property). Here, however, there is no allegation that any such stop notice or mechanics' lien was in fact utilized. Because it is unclear whether or not plaintiff could in fact make such an allegation, the claim is dismissed with leave to amend if plaintiff can do so in good faith.
Assuming that plaintiff is able to cure this defect, it must also allege with greater specificity which subcontractors' rights it seeks to enforce. At present, the complaint simply speaks in generalities about how Gulf Insurance has expended substantial sums to satisfy claims made by unnamed "subcontractors and/or other labor, equipment, or material suppliers who performed work and/or provided materials to the improvements." FAC ¶ 59. While plaintiff need not allege a precise accounting of all such claims, it must at least allege the parties on whose behalf the subrogation claim is asserted.
Finally, First Bank argues that plaintiff has not alleged that the debts were paid in full. Gulf Insurance responds, however, that it received multiple claims by multiple subcontractors — the satisfaction of any of which entitles Gulf to subrogation (assuming, of course, that the other requirements discussed above are met). Because each separate claim may be subrogated, the court finds that plaintiff has sufficiently alleged the requirement that the debts at issue were paid in full.
D. Declaratory Relief
Finally, defendant argues that plaintiff cannot plead a claim for declaratory relief. Under California law, declaratory relief only "operates prospectively, and not merely for the redress of past wrongs." Babb v. Superior Court, 3 Cal. 3d 841, 848 (1971) (quoting Travers v. Louden, 254 Cal. App. 2d 926, 931 (1967));see also Roberts v. Los Angeles County Bar Ass'n, 105 Cal. App. 4th 604, 618 (2003). "The purpose of a judicial declaration of rights in advance of an actual tortious incident is to enable the parties to shape their conduct so as to avoid a breach." Babb, 3 Cal. 3d at 848. At least with respect to the cause of action for breach of contract, however, there exists a fully matured cause of action for money damages. See Canova v. Trustees of Imperial Irrigation Dist. Employee Pension Plan, 150 Cal. App. 4th 1487, 1497 (2007) ("Where, as here, a party has a fully matured cause of action for money, the party must seek the remedy of damages, and not pursue a declaratory relief claim."). Accordingly, declaratory relief would be redundant for purposes of the breach of contract claim.
IV. Conclusion
The motion to dismiss is granted in part and denied in part. Plaintiff is granted ten days leave to amend.
IT IS SO ORDERED.