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Preventive Energy Solutions, LLC v. NCAP Ventures 5 LLC

United States District Court, D. Utah, Central Division

January 9, 2017

PREVENTIVE ENERGY SOLUTIONS, LLC, Plaintiff,
v.
NCAP VENTURES 5 LLC; NCAP VENTURES 11, LLC; ANTHONY J. SUTERA; and RHETT SPENCER, Defendants.

          MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

          Paul M. Warner United States Magistrate Judge

         Pursuant to 28 U.S.C. § 636(c), the parties consented to have a United States Magistrate Judge conduct all proceedings in this case, including trial, entry of final judgment, and all post-judgment proceedings.[1] Defendants nCap Ventures 5, LLC (“nCap 5”), nCap Ventures 11, LLC (nCap 11”), Anthony J. Sutera (“Sutera”), and Rhett Spencer (“Spencer”) (collectively “Defendants”) have motioned the court to dismiss the majority of the above captioned case pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.[2]

         On January 6, 2017, the court heard oral argument on Defendants' Motion.[3] At the hearing, Plaintiff Preventive Energy Solutions, LLC (“Preventive”), was represented by Jared N. Parish and Eric G. Benson. Defendants were represented by Daniel K. Brough. At the conclusion of the hearing, the court took the motion under advisement. Now being fully advised, the court renders the following Memorandum Decision and Order.

         BACKGROUND

         Preventive is a solar panel and photovoltaic system sales and installation company.[4]Defendants are in the business of developing portable home-solar battery products.[5]

         On December 21, 2015, the parties entered into an exclusive Manufacture and Supply Agreement (“MSA”).[6] Prior to entering into the MSA, Preventive alleges that Defendants made several representations about the capability of their solar battery technology.

         Specifically, Preventive claims that Defendants represented that “nCap had invented a rechargeable battery power storage system, which could be connected to a solar panel system, that provided enough battery capacity to power a furnace, refrigerator, and lighting overnight, giving homeowners an uninterruptible power supply which was not dependent on connection to the traditional power grid.”[7] Additionally, Sutera and Spencer told Preventive that Defendants' product was superior to any other battery backup system on the market.[8] Sutera and Spencer represented that Defendants' product: (1) was powerful enough to recharge military-grade lithium ion batteries; (2) had a patent pending; (3) was the only product on the market capable of functioning as both a portable unit and as an in-home solar backup unit; (4) had been tested with successful results; and (5) was functional and could be delivered for immediate sale to homeowners.[9]

         Between December 10, 2015, and December 24, 2015, Sutera assured Preventive that Defendants were on track to deliver fifty products to Preventive within 30 days.[10] Sutera allegedly stated Defendants merely need time to get pricing finalized and cash to finish production.[11] Therefore, on December 15, 2015, Preventive transferred a $500, 000 check to Defendants as an advance for future orders.[12] Furthermore, Preventive hired additional employees and purchased more warehouse space in anticipation of the incoming product from Defendants.[13]

         On December 21, 2015, Preventive executed the MSA with nCap 5 and nCap 11.[14] The MSA required nCap 5 to manufacture Defendants' product and Preventive to agree that nCap 5 would be Preventive's exclusive vendor.[15] The MSA required nCap 5 and Preventive to develop mutually agreeable Product Specifications.[16] Furthermore, to facilitate the transaction, the MSA stated that nCap 11 would obtain a 20% membership interest in Preventive.[17]

         Additionally, the MSA contains a standard representations and warrantees disclaimer, which states:

EXCEPT AS SPECIFICALLY SET FORTH HEREIN, [NCAP5] DOES NOT AND CANNOT WARRANT THE PERFORMANCE, RESULTS, OR OUTPUT THE PRODUCT CUSTOMERS MAY OBTAIN BY USING THE PRODUCT . . . [NCAP5] MAKES NO WARRANTIES, CONDITIONS, REPRESENTATIONS, OR TERMS (EXPRESS OR IMPLIED WHETHER BY STATUTE, COMMON LAW, CUSTOM, USAGE OR OTHERWISE) AS TO ANY MATTER INCLUDING WITHOUT LIMITATION TITLE, ACCURACY, SECURITY, NONINFRINGEMENT OF THIRD PARTY RIGHTS, MERCHANTABILITY, INTEGRATION, SATISFACTORY QUALITY, CAPABILITY, OPERATION, PERFORMANCE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.[18]

         The MSA also includes a standard integration clause wherein the parties agree that “[t]here are no representations, warranties, undertakings or agreements between the parties hereto with respect to the subject matter hereof except as set forth” in the MSA.[19]

         After signing the MSA, Preventive discovered that Defendants' product representations were false. Preventive alleges that Defendants “did not develop the smart charger or battery recharging system, nor could Defendants successfully recharge the military-grade batteries . . . .”[20] Preventive claims that Defendants purchased “widely available existing battery products” and made alterations to the batteries in an attempt to pass off the modified product as their own invention.[21]

         Further, on December 23, 2015, Sutera notified Preventive that Defendants' product would need an entire overhaul to reach the capability expected by Preventive.[22] Preventive alleges that the proposed reengineered product would destroy the portability of the product, would increase the product's cost by thousands of dollars, and would pose “significant health and safety risks to homeowners.”[23]

         To date, Preventive has not ordered or received any product from Defendants.[24]Additionally, Preventive and Defendants never developed mutually agreeable product specifications.[25] On July 19, 2016, Preventive filed the above captioned lawsuit alleging several causes of action, including: fraud, fraudulent inducement, fraudulent misrepresentation, negligent misrepresentation, breach of contract, conversion, unjust enrichment, and theft.[26]

         STANDARDS OF REVIEW

         In deciding a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court presumes the truth of all well-pleaded facts in the complaint, but need not consider conclusory allegations. Tal v. Hogan, 453 F.3d 1244, 1252 (10th Cir. 2006), cert. denied, 549 U.S. 1209 (2007). The court is not bound by a complaint's legal conclusions, deductions, and opinions couched as facts. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 565 (2007). Further, although reasonable inferences must be drawn in the non-moving party's favor, a complaint will only survive a motion to dismiss if it contains “enough facts to state a claim to relief that is plausible on its face.” Id. at 570. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

         Additionally, to sustain a claim of fraud, a plaintiff must satisfy the heightened pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) demands that when “alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9.

         DISCUSSION

         For the following reasons, Defendants' Motion to Dismiss is granted in part and denied in part. It appears to the court that Preventive has taken a shot-gun approach, so to speak, to recover the $500, 000 Preventive advanced to Defendants. The effectiveness or ineffectiveness of this approach is a dispute for another day. After carefully reviewing Preventive's complaint- accepting each of Preventive's factual allegations as true-the court concludes that some of Preventive's claims should be dismissed. Preventive does not allege nCap 11 breached any obligation under the terms of the MSA and, therefore, Preventive does not allege a plausible breach of contract claim against nCap 11. Similarly, Preventive's only plausible claim for unjust enrichment lies with nCap 5. Accordingly, Preventive's unjust enrichment claim against nCap 11, Sutera, and Spencer is dismissed. Finally, Preventive's conversion and theft claims mirror Preventive's breach of contract claim. Therefore, the economic loss rule precludes Preventive from recovering in tort what it can recover in contract. With respect to Preventive's remaining claims, Preventive has alleged sufficient facts to survive a motion to dismiss.

         A. Fraud and Negligent Misrepresentation Claims

         Preventive raises three fraud claims: fraud, fraudulent inducement, and fraudulent misrepresentation. In the alternative, Preventive alleges a cause of action under a theory of negligent misrepresentation. Preventive's misrepresentation theories are straightforward. Preventive alleges that Defendants knowingly made several false representations to induce Preventive into advancing Defendants $500, 000 and signing the MSA.

         Defendants do not attack the pleading sufficiency of Preventive's misrepresentation claims. Rather, Defendants argue that Preventive's misrepresentation claims fail as a matter of law for two reasons. First, Defendants argue that the MSA's disclaimer and integration clause prohibit Preventive from sustaining a claim for fraud or negligent misrepresentation.[27] Second, Defendants contend that this is a straightforward breach of contract case and, therefore, the economic loss rule prevents any recovery in tort.[28] The court finds neither of Defendants' arguments persuasive.

         i. Disclaimer and Integration Clause

         Defendants argue that the MSA's boilerplate representations and warrantees disclaimer, coupled with the MSA's integration clause, prohibits Preventive from claiming it was fraudulently induced into executing the MSA. In other words, Defendants claim that because the MSA expressly disclaims any representations or warranties as to the fitness or viability of Defendants' products, Preventive cannot assert that it was deceived into advancing Defendants $500, 000 or entering into the MSA.[29] Preventive counters that whether Preventive reasonably relied on Defendants' pre-contract representations is a factual question and, more precisely, Defendants cannot use a standard disclaimer and integration clause to shield themselves from tort liability.[30] In the court's view, the MSA's disclaimer and integration clause do not defeat Preventive's fraud and negligent misrepresentation claims.

         a. The MSA's Disclaimer

          It is axiomatic that a party cannot use a boilerplate disclaimer as a shield from liability for fraudulent conduct. Accordingly, the MSA's disclaimer does not defeat Preventive's fraud and negligent misrepresentation claims as a matter of law.

         Under Utah law, to prevail on a claim of fraudulent inducement, a plaintiff must establish:

(1) that a representation was made (2) concerning a presently existing material fact (3) which was false and (4) which the representor either (a) knew to be false or (b) made recklessly, knowing that there was insufficient knowledge upon which to base such a representation, (5) for the purpose of inducing the other party to act upon it and (6) that the other party, acting reasonably and in ignorance of its falsity, (7) did in fact rely upon it (8) and was thereby induced to act (9) to that party's injury and damage.

Keith v. Mountain Resorts Dev., LLC, 2014 UT 32, ¶ 41, 337 P.3d 213 (quotations and citations omitted).[31] Similarly, under Utah law, the elements of a claim for negligent misrepresentation are:

(1) the plaintiffs reasonably relied on the defendant's representation, (2) the representation constitutes a ‘careless or negligent misrepresentation of a material fact, ' (3) the defendant ‘had a pecuniary interest in the transaction, ' (4) the defendant ‘was in a superior position to know the material facts, ' and (5) the defendant ‘should have reasonably foreseen that the injured party was likely to rely upon the' misrepresentation.

Mitchell v. Smith, No. 1:08-cv-103-TS, 2010 WL 5172906, at *8 (D. Utah Dec. 14, 2010) (quoting Price-Orem Inv. Co. v. Rollins, Brown and Gunnel, Inc., 713 P.2d 55, 59 (Utah 1986)). Whether the MSA's general disclaimer precludes Preventive's fraud and negligent misrepresentation claims depends on whether the MSA's general disclaimer renders Preventive's reliance unreasonable as a matter of law.

         “Reasonable reliance must be considered with reference to the facts of each case, and is usually a question for the jury to determine.” Conder v. A.L. Williams & Assocs., Inc., 739 P.2d 634, 638 (Utah Ct. App. 1987) (citations omitted). However, “there are instances where courts may conclude that as a matter of law, there was no reasonable reliance.” Gold Standard, Inc. v. Getty Oil Co., 915 P.2d 1060, 1067 (Utah 1996) (citing cases). For example, a court may determine that a party's reliance is unreasonable where the party is given notice that any reliance on the alleged misrepresentations is misplaced. Id. at 1068. Whether notice renders reliance per se unreasonable depends heavily on the facts and circumstances of the case.

         For example, in Gold Standard, Inc. v. Getty Oil Co., the plaintiff and defendant entered into an operating agreement to engage in a joint mining venture. Id. at 1062. The plaintiff alleged that it had relied on the fraudulent misrepresentations of one of the defendant's representatives during ongoing negotiations between the parties. Id. at 1063. Following the misrepresentations, the plaintiff received several written clarifications which explained that the negotiations. Id. at 1066. After a jury verdict in favor of the plaintiff, the trial court entered in a judgment notwithstanding the verdict in favor of the defendants. Id. The trial judge concluded, “[i]n light of all of the written clarifications” from the defendants, plaintiff “was not entitled as a matter of law to rely upon any inconsistent contemporaneous oral promises” made by the defendants. Id. The Utah Supreme Court affirmed, finding: “a party cannot reasonably rely upon oral statements by the opposing party in light of contrary written information.” Id. at 1068. The court held that the plaintiff's reliance was unreasonable because of the “numerous writings” which provided the plaintiff notice that any reliance on the defendants' representations would be in error. Id.

         Conversely, in TS 1 Partnership v. Allred, a commercial tenant sued its landlord claiming that the landlord fraudulently promised that it would compensate the tenant for any improvements made on the property. 877 P.2d 156, 158-59 (Utah Ct. App. 1994). The landlord argued that the tenant's fraudulent inducement claim was barred because the lease expressly stated that any improvement costs would be paid by the tenant. Id. at 159. The trial court found that tenant's reliance was unreasonable because of the contrary language in the lease. Id. The Utah Court of Appeals reversed, holding: “given [the tenant's] position that she would not have signed the lease, let alone made improvements on the leased space, absent the fraudulent representations, ” the trial court erred in finding the tenant's reliance unreasonable as a matter of law. Id.

         Similarly, in Larsen v. Exclusive Cars, Inc., the purchaser of a truck sued the dealership and car salesmen when the purchaser discovered the truck did not have a new engine as promised by the salesman. 2004 UT App 259, ¶¶ 2-3, 97 P.3d 714. The purchaser signed a sales contract which stated that the purchaser was buying the truck “as is” with “no warrantee.” Id. at ¶ 3.

         Furthermore, the document stated that any oral promises made during the sale were not binding on the dealer. See Id. The Utah Court of Appeals found that the sales contract did not render the purchaser's reliance unreasonable as a matter of law. Id. at ¶ 10. The court noted that the purchaser would have never purchased the truck at the stated price or signed the sales documents absent the salesman's fraudulent representations. Id. The purchaser test drove the truck and there was nothing to place the purchaser on notice that the truck was mechanically defective or did not contain a new engine. Id. at ¶ 11. Therefore, the purchaser was entitled to present his claim of fraudulent misrepresentation to a jury. See id.

         Preventive's claims are more like Allred and Larsen than Gold Standard. Unlike Gold Standard, Preventive did not receive multiple written statements contrary to Defendants' promises. Rather, the MSA contains a run-of-the-mill disclaimer like the disclaimer in Larsen. Furthermore, like Allred and Larsen, Preventive alleges that it would never have advanced Defendants $500, 000 or entered into the MSA had Preventive known Defendants were incapable of delivering a portable solar battery compatible with Preventive's products.[32] The MSA's disclaimer may be probative evidence of unreasonable reliance. However, at the motion to dismiss stage, it would be inappropriate for the court to conclude that the MSA's boilerplate disclaimer renders Preventive's reliance unreasonable.

         b. ...


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