Opinion
No. C 04-1714 PJH.
October 29, 2004
ORDER GRANTING IN PART AND DENYING IN PART COUNTER-DEFENDANTS' MOTION TO DISMISS
The motion of counter-defendants Colonial American Casualty and Surety Company ("Colonial"), The Mountbatten Surety Company, Inc. ("Mountbatten"), and Zurich North American Surety and Financial Enterprises ("Zurich") for an order dismissing the counterclaim pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim came on for hearing on October 20, 2004, before this court. Counter-defendants Colonial, Mountbatten, and Zurich appeared by their counsel Bennett Lee and Timothy Elliot, and counter-claimants Bay Commercial Construction, Inc., Steven Paul Meyer, and Laura Ann Lee Meyer (collectively, "BCC") appeared by their counsel Alan Barnes. Having carefully reviewed the parties' papers and considered the relevant legal authority, and good cause appearing, the court hereby rules as follows for the reasons stated in the hearing.
Pursuant to Civil Local Rule 7-13, this order shall not be cited except as provided by Civil Local Rule 3-4(e).
A. Breach of Contract Claim
BCC filed a counterclaim against Colonial, Mountbatten and Zurich asserting three causes of action arising from the alleged breach of the Joint Control Trust Account Agreement ("JCTAA"). BCC claimed that although Colonial was not a signatory to the JCTAA, Colonial could nonetheless be held liable for the breach of the JCTAA for three reasons. First, BCC alleged that Colonial, Mountbatten and Zurich are affiliated entities and share common ownership, control and management. Second, BCC alleged that during the course of the events underlying the cause of action, Colonial, Mountbatten and Zurich acted through the same personnel without distinctions as to their independent existence and therefore are alter egos of one another. Third, BCC alleged that the person acting on behalf of Colonial, Mountbatten and Zurich simply referred to his principal as "Zurich."
Neither the complaint nor the counterclaim reflect that Colonial is a signatory to the contract. Thus, the breach of contract claim is not viable as to Colonial unless BCC is able to plead and establish another theory of liability that does not expressly require that Colonial be a party to the contract. BCC argues that the counterclaim adequately pleads Colonial's liability based on theories of alter ego and/or single enterprise. However, the court finds that the bare allegations referred to above are without any factual support in the pleadings and fail to set forth a coherent narrative of which theory applies to which relationship, and are thus insufficient to put counter-defendants on notice as to what acts they have committed that result in Colonial's liability for breaching a contract to which it was not a party.
However, it is possible that BCC will be able to plead facts to support the two conditions generally required to apply the alter ego or single enterprise theory of liability. First, a plaintiff must show that there is "such a unity of interest and ownership between the two corporations that their separate personalities are merged, so that one corporation is a mere adjunct of the other or the two companies form a single enterprise." Ngoc Tran v. Farmers Group, Inc., 104 Cal. App. 4th 1202, 1219 (2002); citing Las Palmas Associates v. Las Palmas Center Associates, 235 Cal. App. 3d 1220, 1249-1250 (1991). Second, a plaintiff must show that "an inequitable result would follow if the parent were not held liable." Laird v. Capital Cities/ABC, Inc., 68 Cal. App. 4th 727, 742 (1998), citing Mesler v. Bragg Management Co., 39 Cal. 3d 290, 300 (1985); see also Sonora Diamond Corp. v. Superior Court of Tuolumne County, 83 Cal. App. 4th 523, 538 (2000).
BCC is thus granted leave to amend its counterclaim to plead specific facts showing the existence of such a relationship.
B. Bad Faith Claim
BCC also claims that counter-defendants have committed the tort of bad faith by allegedly breaching the terms of the JCTAA. However, the tort of bad faith breach of implied covenant does not exist against a surety under California law and policy.Cates Construction, Inc. v. Talbot Partners, 21 Cal.4th 28, 43-61 (1999) (distinguishing tort claims for bad faith breach of implied covenant in insurance context from breach of implied covenant in surety claims); see also Mitsui Manufacturers Bank v. Superior Court, 212 Cal. App. 3d 726, 731 (1989) (the ability to recover tort damages in breach of contract situations is limited to those where the contracting parties have some kind of fiduciary relationship, i.e., insurer and insured). Further, if bad faith breach of implied covenant "allegations do not go beyond the mere statement of contract breach," and "simply seek the same damages or other relief already claimed in a companion contract cause of action," the bad faith claim may be "disregarded as superfluous as no additional claim is actually stated." Careau Co. v. Security Pacific Credit, Inc., 222 Cal. App. 3d 1371, 1395 (1990).
The bad faith claim is therefore DISMISSED with leave to amend. If BCC chooses to amend this cause of action, it must include facts showing the JCTAA created a "special relationship" between BCC and counter-defendants such that tort damages may be available in order to survive further Rule 12(b)(6) review.
C. Unfair Business Practices Claim
BCC alleges counter-defendants' breach of the JCTAA constitutes an unfair business practice under California Business and Professions Code, § 17200. The test as to what types of business practices are "unfair" within the meaning of the statute is quite flexible. No clear test to determine what constitutes unfair business practice has been established under California law.Walker v. Countryside Home Loans, 98 Cal. App. 4th 1158, 1170 (2002). One court has said that an unfair business practice is one that "offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers," People v. Casa Blanca Convalescent Homes, Inc., 159 Cal. App. 3d 509, 530 (1984), and another court has stated that to determine whether a business practice is unfair courts must "weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim . . .,"State Farm Fire Casualty Co. v. Superior Court, 45 Cal. App.4th 1093, 1104 (1996). Given the flexible nature of the definition of "unfair" under § 17200, BCC has alleged sufficient facts in its breach of contract claim for there to be a possibility that it could prove that counter-defendants acted unfairly. Counter-defendants' motion to dismiss BCC's unfair business practices claim is therefore DENIED.
CONCLUSION
Counter-defendants' motion to dismiss BCC's breach of contract and bad faith claims is GRANTED and those two claims are DISMISSED with leave to amend. Counter-defendants' motion to dismiss BCC's claim of unfair business practices under California Business and Professions Code § 17200 is DENIED.
BCC has twenty days from the filing of this order to file an amended counterclaim and counter-claimants' response is due twenty days thereafter. If a further motion to dismiss is filed, no hearing will be held and the date for case management conference will be scheduled in the order ruling on the motion. If an answer is filed instead of a further motion, counsel shall contact the undersigned's courtroom clerk to schedule a case management conference immediately. This order fully adjudicates the matter listed at number 6 on the clerk's docket for this case.
IT IS SO ORDERED.