Opinion
No. CIV. S-05-642 LKK/JFM.
November 17, 2006
ORDER
This case involves a contract dispute over the purchase of equipment and equipment packages used to convert sawdust into various forms of energy. Pending before the court is defendant Donald Kunkel's motion for summary judgment and, in the alternative, motion for partial summary adjudication. Kunkel argues that he cannot be held liable in his individual capacity. For the reasons set forth below, defendant's motion for summary judgment is denied, and the motion for partial summary adjudication is granted in part and denied in part.
I. Facts
All facts are undisputed unless otherwise noted.
Plaintiff Pacific MDF Products, Inc. ("Pacific MDF") manufactures a variety of products, including bases, casings, and crown moldings, out of medium density fiberboard ("MDF"). The process of manufacturing these products consumes a large amount of electricity and also produces a significant amount of MDF sawdust, which plaintiff is required by law to capture and dispose of at significant cost. Defendants Bio-Mass Energy Concepts ("BEC") and Advanced Recycling Equipment, Inc. ("ARE") approached plaintiff with a proposal for a system that would convert the sawdust into multiple forms of energy. Specifically, they proposed a "cogeneration" system that would burn sawdust to produce steam, which would in turn produce electricity to run Pacific MDF's plant. On April 15, 2003, plaintiff entered into a contract with ARE and BEC to purchase equipment and equipment packages for the cogeneration system.
Defendant Donald Kunkel ("defendant"), ARE's majority owner, first met with Pacific MDF representatives on April 2, 2001. Def.'s Statement of Undisputed Fact ("SUF") ¶ 11. These representatives included Douglas Hanzlick, the president of Pacific MDF, and William Gregory, the vice president of Pacific MDF, as well as several key Pacific MDF staff who would be involved in the cogeneration project. The meeting initially took place in the main conference room at Pacific MDF's facility. Pl.'s Additional Statement of Undisputed Fact ("ASUF") ¶ 1. When Hanzlick asked defendant if he would provide the financial statements of ARE/BEC and a performance bond, defendant declined to answer and said that the conversation should take place between the owners of the companies.
Plaintiff disputes that the meeting occurred on this date, but the precise date of the meeting is immaterial for the purposes of the motion pending before the court.
Following the meeting in the conference room, defendant, Hanzlick, and Gregory adjourned to a meeting in Hanzlick's private office. When Hanzlick renewed his request for the financial statements of ARE/BEC and a performance bond, defendant responded: "Doug, I know that you are a wealthy man, but so am I. I just sold my company for $50,000,000. We are a private company. We don't give out financial sheets. We don't have any debt. So you don't need a financial statement." SUF ¶ 15. No efforts were made to investigate this claim. Gregory, who attended the meeting to ensure that Pacific MDF was doing business with a reputable company, did not request any proof of the alleged sale, nor did he undertake any independent verification of the sale. Similarly, even though Hanzlick was "a wealthy man with various consultants and resources at his disposal to investigate that information," he also did not investigate defendant's statement. SUF ¶ 22.
When questioned at the meeting about which entity would have ultimate responsibility for the entire system, defendant stated, "That is the beauty of BEC in that we put this all together. And if you have any problem, there is only one person to look [to], and that is me." SUF ¶ 12. At this point, defendant took his finger, made a big circle, and pointed it back at himself to emphasize the point that he would be the only person responsible for the system.
Two years later, on April 15, 2003, plaintiff and ARE/BEC entered into a contract in which plaintiff purchased equipment and equipment packages for the cogeneration system. The contract consisted of two parts, a proposal and purchase agreement. The proposal was signed by Hanzlick and Dave Gamble, the president of BEC. The purchase agreement was signed by Hanzlick and defendant, as the authorized signatory of ARE. The final contract contained a refund and removal clause which provided plaintiff with a full refund and removal of the equipment at ARE/BEC's cost if the system did not work as promised. This clause was not present in the first revision of the contract in October 2002, but was inserted at a later date upon the suggestion of Gregory.
On March 31, 2005, plaintiff filed its complaint against ARE, BEC, and defendant Kunkel. The complaint alleges, inter alia, breach of express warranty, breach of implied warranties, fraud, negligent misrepresentation, and violation of section 17200 of the California Business and Profession Code. Pending before the court is defendant Kunkel's motion for summary judgment and, in the alternative, motion for partial summary adjudication.
II. Standard SUMMARY JUDGMENT STANDARDS UNDER FED. R. CIV. P. 56
Summary judgment is appropriate when it is demonstrated that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); See also Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970); Secor Ltd. v. Cetus Corp., 51 F.3d 848, 853 (9th Cir. 1995).
Under summary judgment practice, the moving party
[A]lways bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact.Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "[W]here the nonmoving party will bear the burden of proof at trial on a dispositive issue, a summary judgment motion may properly be made in reliance solely on the `pleadings, depositions, answers to interrogatories, and admissions on file.'" Id. Indeed, summary judgment should be entered, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. See id. at 322. "[A] complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Id. In such a circumstance, summary judgment should be granted, "so long as whatever is before the district court demonstrates that the standard for entry of summary judgment, as set forth in Rule 56(c), is satisfied." Id. at 323.
If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist.Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); see also First Nat'l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968); Secor Ltd., 51 F.3d at 853.
In attempting to establish the existence of this factual dispute, the opposing party may not rely upon the denials of its pleadings, but is required to tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in support of its contention that the dispute exists. Fed.R.Civ.P. 56(e); Matsushita, 475 U.S. at 586 n. 11; see also First Nat'l Bank, 391 U.S. at 289; Rand v. Rowland, 154 F.3d 952, 954 (9th Cir. 1998). The opposing party must demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the suit under the governing law, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Owens v. Local No. 169, Ass'n of Western Pulp and Paper Workers, 971 F.2d 347, 355 (9th Cir. 1992) (quoting T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987)), and that the dispute is genuine, i.e., the evidence is such that a reasonable jury could return a verdict for the nonmoving party, Anderson, 477 U.S. 248-49; see also Cline v. Indus. Maint. Eng'g Contracting Co., 200 F.3d 1223, 1228 (9th Cir. 1999).
In the endeavor to establish the existence of a factual dispute, the opposing party need not establish a material issue of fact conclusively in its favor. It is sufficient that "the claimed factual dispute be shown to require a jury or judge to resolve the parties' differing versions of the truth at trial."First Nat'l Bank, 391 U.S. at 290; see also T.W. Elec. Serv., 809 F.2d at 631. Thus, the "purpose of summary judgment is to `pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.'" Matsushita, 475 U.S. at 587 (quoting Fed.R.Civ.P. 56(e) advisory committee's note on 1963 amendments); see also Int'l Union of Bricklayers Allied Craftsman Local Union No. 20 v. Martin Jaska, Inc., 752 F.2d 1401, 1405 (9th Cir. 1985).
In resolving the summary judgment motion, the court examines the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any. Rule 56(c); see also In re Citric Acid Litigation, 191 F.3d 1090, 1093 (9th Cir. 1999). The evidence of the opposing party is to be believed, see Anderson, 477 U.S. at 255, and all reasonable inferences that may be drawn from the facts placed before the court must be drawn in favor of the opposing party,see Matsushita, 475 U.S. at 587 (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam)); see also Headwaters Forest Def. v. County of Humboldt, 211 F.3d 1121, 1132 (9th Cir. 2000). Nevertheless, inferences are not drawn out of the air, and it is the opposing party's obligation to produce a factual predicate from which the inference may be drawn. See Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985), aff'd, 810 F.2d 898, 902 (9th Cir. 1987).
Finally, to demonstrate a genuine issue, the opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'"Matsushita, 475 U.S. at 587 (citation omitted).
III. Analysis
Defendant moves for summary judgment on the grounds that he entered into the contract with Pacific MDF as an agent of ARE, rather than in his individual capacity. Accordingly, he maintains that any liability arising out of the contract flows only to ARE and that summary judgment should be granted as to all claims. In the alternative, defendant seeks partial summary adjudication as to each claim. Specifically, he argues that the fraud and negligent misrepresentation claims fail because plaintiff has not proven the element of reasonable reliance, and that damages are not available under section 17200 of the California Business and Profession Code. For the reasons set forth below, defendant's motion for summary judgment is denied, and the motion in the alternative for partial summary adjudication is granted in part and denied in part.
A. Defendant Kunkel's Individual Liability
The crux of defendant's motion for summary judgment is that he cannot be held liable in his individual capacity because he was acting as a representative of ARE in executing the contract. Plaintiff responds that its claims against defendant do not arise out of the written contract but, rather, arise out of defendant's conduct prior to execution of the contract. As explained below, the court finds that there is a genuine dispute as to whether defendant was acting in his individual or representative capacity before the contract was signed. Accordingly, summary judgment must be denied.
It is well-settled law that an agent is not responsible for liability stemming from a contract entered into on behalf of a principal. Restatement of Agency 2d, § 328 ("An agent, by making a contract only on behalf of a competent disclosed or partially disclosed principal whom he has power to bind, does not thereby become liable for its non-performance."). Here, there is no dispute that when defendant entered into an agreement with plaintiff, he did so only as an authorized agent of ARE. Accordingly, while there was privity of contract between plaintiff and ARE, there was no such privity between plaintiff and defendant.
Plaintiff maintains, however, that defendant's liability stems not from his conduct in executing the contract but from the representations that he made prior to executing the contract. Some of these representations — specifically, those made during the meeting on April 2, 2001 — clearly create a genuine dispute about whether defendant was acting within his representative capacity. However, the other representations — those related to defendant's ability to perform — present a closer issue. The court addresses each category of these representations in turn.
1. Representations Made During the April 2, 2001 Meeting
First, plaintiff has identified several representations made by defendant on April 2, 2001 that could reasonably be construed as statements made within his individual capacity. For example, at the meeting, when plaintiff asked defendant who would have ultimate responsibility for the entire system, defendant responded: "That is the beauty of BEC in that we put this all together. And if you have any problem, there is only one person to look [to], and that is me." SUF ¶ 12. Indeed, at that same meeting, defendant made a big circle with his finger and pointed it back at himself to emphasize that he bore ultimate responsibility for the entire system.
Furthermore, in response to requests by Hanzlick, president of Pacific MDF, for a performance bond and/or financial statements from ARE/BEC, defendant declined. This request was made at the main conference room at Pacific MDF's offices, in the presence of several Pacific MDF staff. Plaintiff responded that this was a conversation that should take place between the owners of the companies. Following this meeting, defendant and Hanzlick adjourned to a private office, where defendant declined to provide a performance bond or financial statements. Instead, he offered the following assurance: "Doug, I know you are a wealthy man, but so am I. I just sold my company for $50,000,000. We are a private company. We don't give out financial sheets. We don't have any debt. So you don't need a financial statement." SUF ¶ 15.
There is clearly a genuine dispute as to whether defendant was acting in his representative capacity when making these statements. Indeed, the persuasive force of defendant's statements relies upon the fact that he was making a personal guarantee, rather than a representative guarantee; otherwise, a performance bond and the financial statements would have still been needed to assuage plaintiff's concerns.
2. All Other Representations
It is a closer issue whether the other representations identified by plaintiff could reasonably be construed as statements made in defendant's individual capacity. These representations mostly pertain to defendant's ability to perform (the "performance-related representations"). Compl. ¶ 35. For instance, it is undisputed for purposes of this motion that defendant lied when he represented that ARE/BEC had the experience to provide a turnkey co-generation facility, that the entire system would be automated, and the equipment used in the facility would be new.
Defendant characterizes the performance-related representations as ones made in his representative capacity. Admittedly, these representations are unlike those containing self-evident personal guarantees, for instance, or those made under circumstances suggesting that defendant was stepping outside his role as a representative of ARE (e.g., private office meetings). Nevertheless, the evidence that defendant cites in support of its contention that the representations were made in a representative capacity is simply silent as to that issue.
The evidence consists of defendant's response to an interrogatory. Bodzin Decl., Ex. E, 8:11-9:16. The response merely recites the alleged misrepresentations but does not disclose any facts that would assist in the determination of whether they were made in defendant's individual or representative capacity.
Accordingly, defendant has failed to tender sufficient evidence to establish the absence of a genuine dispute on the issue. Moreover, the general presumption is that no agency exists, and that each person is acting for himself or herself. See Inglewood Teachers Ass'n v. Public Employment Relations Bd., 227 Cal. App. 3d 767, 780 (2d Dist. 1991) ("The law indulges in no presumption that an agency exists but instead presumes that a person is acting for himself and not as agent for another.") (internal quotation marks omitted).
The question of agency is, typically, one for the jury to resolve. See L. Byron Culver Assocs. v. Jauodi Industrial Trading Corp., 1 Cal. App. 4th 300, 305 (4th Dist. 1991) ("The existence of an agency is a factual question within the province of the trier of fact."); Pistone v. Superior Court, 228 Cal. App. 3d 672, 679 (1st Dist. 1991) ("The existence or absence of agency ordinarily poses a question of fact. Unless the evidence permits only one inference, the question is one for the trier of fact.").
In order to prevail on summary judgment as to the entirety of the case, defendant must prove that he was acting in his representative capacity at all relevant times. He has not met this burden here, at least with respect to the aforementioned representations. Accordingly, the court denies defendant's motion for summary judgment.
B. Liability for Each Claim
Having addressed defendant's liability as a general matter, the court turns to defendant's motion for partial summary adjudication as to each claim. These claims include (1) breach of express warranty, (2) fraud, (3) negligent misrepresentation, and (4) violation of section 17200 of the California Business and Profession Code. Plaintiff has abandoned two other claims with respect to defendant.
This includes the first cause of action for breach of express warranty arising out of the written contract. As discussed above, this claim is not viable against Kunkel, who was acting in his representative capacity in signing the contract. However, plaintiff has not abandoned its second express warranty claim, which addresses liability for representations made outside the contract. Plaintiff has also abandoned its third cause of action for breach of implied warranty arising out of the written contract.
1. Breach of Express Warranty
First, defendant moves for partial summary adjudication as to the breach of express warranty claim. An express warranty includes "[a]ny affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain." Cal. Commercial Code § 2313. Again, the thrust of defendant's argument is that any representations giving rise to an express warranty were made in a representative capacity. As discussed above, however, this is the subject of a genuine dispute and is typically a question for the jury. Accordingly, defendant's motion for partial summary adjudication as to the express warranty claim is denied.
Defendant also argues in his reply brief that even if he was acting in his individual capacity, no express warranty could be created in the absence of a contract between him, in his individual capacity, and plaintiff. If this argument was set forth in defendant's moving papers, it was not sufficiently clear to afford plaintiff a fair opportunity to respond, and, in any event, is unsupported by case law indicating that privity of contract is required for express warranty claims. The only cases cited by defendant in his moving papers with regard to this issue either discuss the general circumstances giving rise to an express warranty or recite basic principles of agency.
2. Fraud
Defendant next moves for partial summary adjudication as to the fraud claim. He maintains that plaintiff did not rely on his representations and that even if it did, this reliance was unreasonable. For the reasons set forth below, defendant's motion is granted in part and denied in part.
In California, a cause of action for intentional misrepresentation or fraud requires that the plaintiff prove the following: (1) a misrepresentation (false representation, concealment, or nondisclosure), (2) knowledge of falsity, (3) intent to deceive or induce reliance, (4) justifiable reliance, and (5) resulting damage. Lazar v. Superior Court, 12 Cal. 4th 631, 638 (1996); Engalla v. Permanente Medical Group, Inc., 15 Cal. 4th 951, 974 (1997); Glenn K. Jackson Inc. v. Roe, 273 F.3d 1192, 1201 (9th Cir. 2001). The absence of any element bars recovery. Okun v. Morton, 203 Cal. App. 3d 805, 828 (2d Dist. 1988).
A. Actual Reliance
First, defendant argues that plaintiff did not actually rely on his representations that he would personally guarantee performance of the contract. Actual reliance exists where the misrepresentation was an immediate cause of the plaintiff's conduct and where, but for the misrepresentation, the plaintiff would not have entered into the contract "in all reasonable probability." Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th 1226, 1239 (1995). The misrepresentation need not be the only cause of plaintiff's damages but must have been a "substantial factor" that induced the plaintiff to act. Wennerholm v. Stanford Univ. Sch. of Medicine, 20 Cal. 2d 713, 717 (1942);see also Engalla, 15 Cal. 4th at 977 (holding that the misrepresentation need not be "the sole or even the predominant or decisive factor").
Here, defendant points out that the final contract contained a clause providing for a full refund if the system did not work as promised and a removal of the equipment at ARE/BEC's expense (the "refund clause"). Moreover, it is undisputed that the refund clause did not exist at the time of the April 2001 meeting, when defendant made the allegedly fraudulent representations, but was inserted at some point after October 2002. In other words, defendant's position is that plaintiff entered into the contract on the basis of the later-inserted refund clause — not on the basis of defendant's representations.
In its opposition, plaintiff states that, when requesting financial statements and a performance bond, "Mr. Hanzlick already had in hand a draft of the contract and found the warranty provisions in the draft to be insufficient." Pl.'s Opp'n at 12. To the extent that the "warranty provisions" refer to the refund clause, there is no support for this statement in the record. Indeed, plaintiff conceded that the refund clause was not in existence as of October 2002. Pl.'s Response to SUF ¶ 25.
Even taking the refund clause into account, there is still a genuine dispute as to whether defendant's misrepresentations constituted a "substantial factor" in plaintiff's decision to enter into the contract, and whether "in all reasonable probability" it would not have done so without those misrepresentations. There is a distinction, for instance, between a refund clause and a performance bond, in that plaintiff would have greater certainty of actually recovering its losses with the latter. Accordingly, plaintiff might have abandoned its request for the bond in light of both the refund clause and defendant's personal guarantee. This is the type of dispute over which reasonable minds could disagree, rendering summary adjudication inappropriate.
B. Justifiable Reliance
Second, defendant argues that plaintiff's reliance was not justifiable or reasonable. In assessing the reasonableness of a plaintiff's reliance, the court must consider the plaintiff's level of knowledge, education, and experience. Guido v. Koopman, 1 Cal. App. 4th 837, 843 (1st Dist. 1991) (holding that a licensed attorney's reliance on the advice of an equestrian instructor regarding the validity of a release of liability was not reasonable). Justifiable reliance is usually a question of fact but becomes a question of law when reasonable minds could come to only one conclusion based on the facts. Id. at 843.
Here, defendant maintains that it was unreasonable for plaintiff to take at face value defendant's representations, including the statement that he just sold a company for $50 million, without undertaking any due diligence to determine whether the sale took place, or to even find out the name of the company. Furthermore, it is undisputed that Hanzlick is "a wealthy man with various consultants and resources at his disposal." SUF ¶ 22. In addition, Gregory, who was also present at the April 2001 meeting, is a licensed attorney but did not advise Hanzlick to investigate defendant's statements.
The court finds that it was unreasonable as a matter of law for Hanzlick, and therefore plaintiff, to rely on the April 2, 2001 representations. Hanzlick's reliance must be judged, not by the standard of a reasonable person, but by the standard of a reasonable CEO or company president. Viewed from this perspective, his reliance on defendant's April 2, 2001 representations without any conducting any due diligence was unreasonable. See Grumman Allied Industries, Inc. v. Rohr Industries, Inc., 748 F.2d 729, 737 (2d Cir. 1984) ("Where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, courts are particularly disinclined to entertain claims of justifiable reliance."); In re AHT Corp., 292 B.R. 734, 743 (S.D.N.Y. 2003) (finding that the failure of a sophisticated business enterprise to inquire into CEO's statements regarding business deal was unreasonable as a matter of law). Indeed, it could be argued that the more plaintiff relied on defendant's representations, the more unreasonable it was for plaintiff not to undertake any type of due diligence.
Arguably, plaintiff's reliance on the $50 million statement might have been reasonable to the extent that it indicated defendant's willingness to personally guarantee the system, even if it was unreasonable to the extent it indicated defendant's financial ability to personally guarantee the system. However, it would still be unreasonable for plaintiff to rely on a personal guarantee that it should have known defendant could not in fact deliver.
The court notes that its ruling with respect to the April 2, 2001 representations does not extend to the other, performance-related representations. See Compl. ¶ 35. Contrary to the representations regarding defendant's financial status, which could be easily verified, these other representations (i.e., the claim that new equipment would be used) would be more difficult to investigate. At least in part, this is because many of the performance-related representations reflected defendant's future intentions. Moreover, defendant has only demonstrated that reliance with respect to the April 2, 2001 representations would be unreasonable; it has not briefed the issue of reliance with respect to the performance-related representations.
Accordingly, the court grants the motion for partial summary adjudication with respect to the April 2, 2001 representations and denies the motion with respect to the performance-related representations.
3. Negligent Misrepresentation
Defendant also moves for partial summary adjudication as to the negligent misrepresentation claim. The elements of a cause of action for negligent misrepresentation are similar to those for fraud, except that plaintiff need not prove the element of scienter. Gagne v. Bertran, 43 Cal. 2d 481, 487-88 (1954). Like fraud, a claim of negligent misrepresentation requires proof of justifiable reliance. For the reasons discussed above, plaintiff's reliance on the April 2, 2001 misrepresentations was unreasonable. Accordingly, the court grants the motion for partial summary adjudication with respect to the April 2, 2001 representations and denies the motion with respect to the performance-related representations.
4. California Business and Profession Code § 17200
Defendant last moves for summary adjudication with respect to the issue of damages under the Unfair Competition Law ("UCL"). Cal. Bus. Prof. Code § 17200. It is well-settled that non-restitutionary damages are not permitted under the UCL. See Korea Supply Co v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1149 (2003). In the prayer for relief, plaintiff seeks "compensatory and consequential damages," Compl. 12:3-6, which defendant construes as seeking more than restitution. However, the section of the complaint setting forth the relevant cause of action makes clear that plaintiff seeks only restitution. Accordingly, the court grants the motion to the extent there is any ambiguity that plaintiff seeks more than restitution.
IV. Conclusion
Accordingly, the court orders as follows:
1. Defendant's motion for summary judgment is DENIED.
2. Defendant's motion for partial summary adjudication with respect to the breach of express warranty claim is DENIED.
3. Defendant's motion for partial summary adjudication with respect to the fraud claim is GRANTED in part and DENIED in part.
4. Defendant's motion for partial summary adjudication with respect to the negligent misrepresentation claim is GRANTED in part and DENIED in part.
5. Defendant's motion for partial summary adjudication with respect to the issue of damages under section 17200 of the California Business and Profession Code is GRANTED.
IT IS SO ORDERED.