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CE Providers v. Stearns Bank

United States District Court, D. Utah

July 17, 2018

CE PROVIDERS, Plaintiff,
v.
STEARNS BANK Defendant.

          MEMORANDUM DECISION AND ORDER GRANTING MOTION TO DISMISS AND GRANTING IN PART DEFENDANT'S MOTION FOR SURREPLY

          Ted Stewart United States District Judge

         This matter is before the Court on Defendant's Motion to Dismiss for Failure to State a Claim and Plaintiff's Motion for Surreply. For the reasons set forth below, the Court will grant Defendant's Motion and grant Plaintiff's Motion in part.

         I. BACKGROUND

         In 2016, Plaintiff CE Providers, LLC (“Plaintiff” or “CEPS”) sold a business to Joppa Capital Ventures, Inc. (“Joppa”)-a non-party to this action. Plaintiff seller-financed a portion of the purchase and Defendant Stearns Bank National Association (“Defendant” or “Stearns”) provided the remaining funding.

         As a prerequisite to issuing the funds, Defendant required that Plaintiff and Joppa enter into several agreements, including an intercreditor agreement (the “Agreement”), wherein the parties agreed that the loan issued to Joppa by Plaintiff would be entirely subordinated to the loan issued by Defendant. Also included in the Agreement is a holdback provision wherein the parties agree that Defendant would hold $500, 000 of the purchase price as additional security. Under the terms of the Agreement, Defendant is to release the holdback funds to Plaintiff in three instalments to be paid on the anniversary of the Agreement for three years. The first instalment in the amount of $166, 667.00 was due December 8, 2017. The Agreement provides Defendant with the right to retain the holdback funds as security if Joppa is in default to Defendant or in Defendant's discretion “pursuant to [the] Agreement.”[1]

         On November 10, 2017, following an unrelated dispute between Plaintiff and Joppa regarding Joppa's refusal to share certain information, Plaintiff sent a letter to Joppa notifying it that Joppa was in default to Plaintiff. Having learned that Plaintiff considered Joppa in default of Plaintiff's loan, Defendant chose to retain the first holdback payment until Joppa and Plaintiff reached a resolution. A dispute arose between Plaintiff and Defendant regarding Defendant's rights under the Agreement. On January 25, 2018, Plaintiff filed this suit in the Third District Court of Utah in response to Defendant's continued refusal to disperse the holdback funds. Defendant removed the matter to this Court on January 30, 2018, on the basis of diversity jurisdiction.

         Plaintiff's Complaint alleges (1) breach of fiduciary duty and (2) unjust enrichment; and seeks declaratory relief that (3) Defendant was obligated to disperse the funds as stated in the Agreement, its failure to do so amounts to a material breach of the Agreement, and, therefore, the Agreement is void and without legal effect such that Plaintiff's loan is no longer subordinated to Defendant's loan; and (4) that Defendant's failure to declare Joppa in default and failure to make the first holdback payment to Plaintiff amounts to a waiver of right to declare Joppa in default.

         In response, Defendant filed the Motion to Dismiss now before the Court. Defendant argues that each of Plaintiff's claims should be dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure because they fail to state a claim upon which relief can be granted. Specifically, Defendant argues that Plaintiff's breach of fiduciary duty and unjust enrichment claims are barred by the economic loss rule, and that Plaintiff's declaratory judgment claims are directly contrary to the language of the Agreement.

         Following Plaintiff's Response and Defendant's Reply, Plaintiff filed a Motion for Leave to File a Surreply, arguing that Defendant raised arguments and facts for the first time in its Reply and, thus, Plaintiff should be allowed to address them. Plaintiff attached its proposed surreply to its Motion.

         II. DISCUSSION

         A. MOTION FOR SURREPLY

         “The court may permit the filing of a surreply at its discretion.”[2] “In general, a court will grant the nonmoving party an opportunity to file a surreply brief if it has not had the opportunity to respond to new evidence or new legal arguments presented by the moving party in a reply memorandum.”[3]

         Plaintiff argues that Defendant presented two new arguments in its Reply Memorandum: (1) that the alleged breach of contract committed by Stearns was immaterial; and (2) that the alleged breach of contract by CEPS was material. Defendant contends that those issues were presented on page 4 of the Motion to Dismiss and argued by both parties in the subsequent briefing.

         First, Defendant's Motion to Dismiss does allege that CEPS breached the contract, but does not allege whether that breach was material or immaterial. Defendant alleges that Plaintiff materially breached the contract for the first time in its Reply.[4] Therefore, the Court finds that Plaintiff did not have an opportunity to respond to that specific allegation and has considered the arguments in the Surreply on that issue. However, these arguments in Plaintiff's Surreply were not relevant in the following analysis of Defendant's Motion to Dismiss.

         Second, as alleged by Plaintiff, Defendant argues that its alleged breach would not amount to a material breach for the first time in its Reply. However, Defendant makes this argument in response to Plaintiff's Response Memorandum, which argues that Defendant breached the contract and that breach was material. Plaintiff, therefore, has already presented arguments regarding this issue and the Court has not considered further arguments related to the materiality of Defendant's alleged breach in Plaintiff's Surreply. Again, regardless, these arguments were not relevant to the analysis below.

         B. MOTION TO DISMISS

         In considering a motion to dismiss for failure to state a claim upon which relief can be granted under Rule 12(b)(6), all well-pleaded factual allegations, as distinguished from conclusory allegations, are accepted as true and viewed in the light most favorable to Plaintiff as the nonmoving party.[5] Plaintiff must provide “enough facts to state a claim to relief that is plausible on its face, ”[6] which requires “more than an unadorned, the-defendant-unlawfully harmed-me accusation.”[7] “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.'”[8]

         “The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted.”[9] As the United States Supreme Court in Iqbal stated,

only a complaint that states a plausible claim for relief survives a motion to dismiss. Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not shown-that the pleader is entitled to relief.[10]

         In considering a motion to dismiss, a district court not only considers the complaint, “but also the attached exhibits, ”[11] and “documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.”[12] The Court “may consider documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity.”[13]

         Plaintiff brings four causes of action in its Complaint: unjust enrichment, breach of fiduciary duty, declaratory judgment that Defendant breached the contract, among other things, and declaratory judgment that Defendant has waived its right to declare Joppa in default. Defendant argues each of these claims should be dismissed.

         i. Unjust enrichment

         “The doctrine [of unjust enrichment] is designed to provide an equitable remedy where one does not exist at law. In other words, if a legal remedy is available, such as breach of an express contract, the law will not imply the equitable remedy of unjust enrichment.”[14]

         Plaintiff argues its unjust enrichment claim is appropriately before this Court because there is not a valid contract governing the dispute. Plaintiff explains that there is not a valid contract because Defendant materially breached the contract and, therefore, the Agreement is invalid.[15] This argument finds no support in the law. While a material breach of contract will excuse the non-breaching party from further performance on the contract, [16] a material breach does not automatically result in a full eradication of the contract as if it never existed. If this were the case, a material breach would have the backwards effect of relieving all parties of their obligations under the contract, potentially rewarding the breaching party. Notably, Plaintiff's Complaint includes causes of action relying on the existence of the Agreement. Plaintiff cannot simultaneously argue the Agreement is wholly invalid while seeking a declaration of rights under the provisions of the same agreement.

         A material breach generally will give the non-breaching party “the right of rescission and an action for restitution as an alternative to an action for damages.”[17] However, “[t]o rescind a partially executed contract, the party seeking rescission usually must be able to place the other party in the same position that existed before the execution of the contract.”[18] Plaintiff has not requested rescission or alleged that it has the ability to place Defendant in the same position it was prior to the Agreement. Moreover, as will be discussed, Defendant's retention of the holdback funds is permitted under the Agreement. Therefore, there was no breach, material or otherwise.

         Because there is an enforceable contract between the parties, Plaintiff's unjust enrichment claim is invalid and the Court will dismiss it as such.

         ii. Breach of Fiduciary Duty

         Defendant argues that Plaintiff's claim for breach of fiduciary duty is barred by Utah's economic loss rule. “The economic loss rule is a judicially created doctrine that marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.”[19] “The economic loss rule requires that a contract claim provide the remedy for an ‘economic loss.'”[20] “[E]conomic losses are those that arise from breach of contract.”[21]

         The Utah Supreme Court expressly adopted the following interpretation of the economic loss rule in Hermansen v. Tasulis:[22]

The proper focus in an analysis under the economic loss rule is on the source of the duties alleged to have been breached. Thus, our formulation of the economic loss rule is that a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.[23]

         Plaintiff has not alleged a breach of duty separate from its contract-related claims. Defendant took possession of the holdback funds in accordance with the Agreement. Now, the dispute between Plaintiff and Defendant arises under their differing interpretations of Defendant's rights to the holdback funds under the language of the Agreement. Notably, Plaintiff's Complaint references the Agreement in outlining its breach of fiduciary duty claim, stating “[u]nder the terms of the Intercreditor Agreement, Stearns took upon itself the obligation to hold and guard CEP's funds.”[24] The alleged breach of fiduciary duty is, therefore, wholly related to the Agreement between the two parties. Plaintiff has not alleged a breach of any duty that does not directly relate to the duties imposed on the parties by the Agreement. As Defendant argues, quoting this Court, “[i]t is clear that the duties alleged by the plaintiff in its tort claims are not independent of the parties' contract but are part and parcel of the defined rights, obligations and potential liabilities mutually agreed to by the parties.”[25] Plaintiff's claim for breach of fiduciary duty is, therefore, barred by the economic loss rule.

         Even if Plaintiff alleged an independent breach, Defendant does not hold a fiduciary relationship with Plaintiff. “A fiduciary is a person with a duty to act primarily for the benefit of another” and one who “is in a position to have and exercise and does have and exercise influence over another.”[26]

There is no invariable rule which determines the existence of a fiduciary relationship, but it is manifest in all the decisions that there must be not only confidence of the one in the other, but there must exist a certain inequality, dependence, weakness of age, of mental strength, business intelligence, knowledge of the facts ...

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