Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-00957/USCOURTS-caed-2_06-cv-00957-1/pdf.json

Nature of Suit Code: 150
Nature of Suit: Overpayments &amp; Enforcement of Judgments
Cause of Action: 28:1332 Diversity-Contract Dispute

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

INTERNATIONAL UNION OF

OPERATING ENGINEERS, LOCAL 3,

an unincorporated association;

JOHN BONILLA, as Business

Manager of the INTERNATIONAL

UNION OF OPERATING ENGINEERS,

LOCAL UNION NO. 3;

NO. CIV. S-06-0957 WBS KJM

Plaintiffs,

v. MEMORANDUM AND ORDER RE: 

MOTION TO DISMISS

ZURICH NORTH AMERICA, SURETY &

FINANCIAL CLAIMS; ZURICH

AMERICAN INSURANCE COMPANY;

ZURICH NORTH AMERICAN

INSURANCE COMPANY; AMERICAN

ZURICH INSURANCE COMPANY;

ZURICH NORTH AMERICA; FIDELITY

& DEPOSIT COMPANY OF MARYLAND;

F&D FINANCIAL SERVICES; THE

ZURICH NORTH AMERICA

COMPANIES; AND DOES 1-100,

inclusive;

Defendants.

----oo0oo----

Currently before the court is defendants’ motion to 

dismiss all defendants other than Fidelity and Deposit Company of

Maryland (“F&D”) for failure to state a claim for breach of

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contract. For the following reasons, the court grants

defendants’ motion. 

I. Factual Background

Plaintiff International Union of Operating Engineers,

Local Union No. 3 (“Local 3”) is a labor organization and a

California unincorporated association located in Sacramento,

California. (First Am. Compl. ¶ 1.) Plaintiff John Bonilla is

the business manager of Local 3. (Id.) On July 1, 2002, Local 3

entered into a labor organization bond, or insuring agreement,

with F&D, a copy of which is attached to the complaint. (Id.

Attach. 1 (Bond).) No other defendants signed the bond. (Id.) 

The names “Zurich North America” and “Zurich F&D” appear in

facsimile banners that indicate entities to whom a copy of the

bond was faxed. (Id.) 

On August 22, 2005, Local 3 filed suit against Donald

Doser, a former employee of the organization. (Id.; see also

Pls.’ Opp’n to Mot. to Dismiss 3.) Doser had allegedly committed

a number of tortious acts that constituted a breach of his

fiduciary duty to Local 3, including changing employment policies

to his own financial benefit, unilaterally granting himself

several wage increases, and converting the corporation’s funds to

his personal use. (Id. ¶ 4.) Local 3 provided defendant Zurich

with notice of this suit, supporting documentation of its losses,

and a proof of loss form in order to file a claim for

reimbursement for these losses under the insurance bond. (Id. ¶¶

8-13.) 

After learning that there was a limitation on the time

period in which a lawsuit could be filed for claims made under

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the bond (Pls.’ Opp’n 3), plaintiffs filed suit against Zurich

North America, Surety and Financial Claims; Zurich American

Insurance Company; Zurich North American Insurance Company;

American Zurich Insurance Company; and Zurich North America;

plaintiffs did not name defendant F&D. (Compl.) Defense

attorney Calvin Whang informed plaintiffs that defendant F&D was

the insurer who had issued the bond, not the defendants named in

the complaint. (Pls.’ Opp’n to Mot. to Dismiss 4.) Plaintiffs

subsequently conducted a corporate records search of defendant

F&D and now contend that F&D is related to the other defendants. 

(Id.) In their first amended complaint, plaintiffs allege that

defendants failed to perform under the terms of the insurance

contract because they did not compensate plaintiffs for the

losses they incurred as a result of Doser’s actions, pay the

claim they submitted, and/or indemnify plaintiffs on this claim. 

(First Am. Compl. ¶ 21.) Plaintiffs additionally allege that:

Defendants Zurich of North America, Surety and 

Financial Claims; Zurich American Insurance 

Company; Zurich North American Insurance Company;

American Zurich Insurance Company; Zurich North

America; Fidelity and Deposit Company of Maryland; F&D

Financial Services and the Zurich North America

Companies [] are corporations, subsidiaries of

corporations, parent corporations, partners and/or

other organizational classifications licensed to

conduct the business of issuing fidelity bonds . . 

. . 

(Id. ¶ 2.) Further, plaintiffs allege that “each defendant is

the agent and/or partner of the other and each were acting in the

course and scope of said agency and/or partnership.” (Id.) 

Defendants now move to dismiss as against all

defendants except for defendant F&D, contending that F&D was the

only underwriter of the bond and that all other defendants

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therefore cannot be sued for breach of the insurance contract. 

II. Discussion

A motion to dismiss pursuant to Federal Rule of Civil

Procedure 12(b)(6) “tests the legal sufficiency of a claim.”

Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The court

may not dismiss for failure to state a claim unless “it appears

beyond doubt that plaintiff can prove no set of facts in support

of his claim which would entitle him to relief.” Van Buskirk v.

CNN, Inc., 284 F.3d 977, 980 (9th Cir. 2002). On a motion to

dismiss, the court must accept the allegations in the complaint

as true and draw all reasonable inferences in favor of the

pleader. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Cruz v.

Beto, 405 U.S. 319 (1972). 

However, “[t]he court does not accept as true

conclusory legal allegations cast in the form of factual

allegations,” or unwarranted inferences. County of Marin v.

Martha Co., No. 06-0200, 2006 WL 2586967, at *3 (N.D. Cal. Sept.

8, 2006) (citing W. Mining Council v. Watt, 643 F.2d 618, 624

(9th Cir. 1981))). In particular, the court is not “required to

accept as true conclusory allegations which are contradicted by

documents referred to in the complaint.” Steckman v. Hart

Brewing Inc., 143 F.3d 1293, 1295 (9th Cir. 1998). Dismissal of

the complaint is appropriate where the pleader fails to allege

facts that support a cognizable legal theory. Balistreri v.

Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988); see

also Conley v. Gibson, 355 U.S. 41, 47 (1957) (complaint must

“give the defendant fair notice of what the plaintiff’s claim is

and the grounds upon which it rests”). 

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A. Consideration of Evidence External to the Complaint

When deciding a motion to dismiss, a court may not

ordinarily consider material other than the facts alleged in the

complaint. Anderson v. Angelone, 86 F.3d 932, 934 (9th Cir.

1996) (“A motion to dismiss . . . must be treated as a motion for

summary judgment . . . if either party . . . submits materials

outside the pleadings in support or opposition to the motion, and

if the district court relies on those materials.”). “A court

may, however, consider certain materials--documents attached to

the complaint, documents incorporated by reference in the

complaint, or matters of judicial notice--without converting the

motion to dismiss into a motion for summary judgment.” United

States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (citations

omitted).

Because plaintiffs have attached the bond at issue here

to their complaint, the court may consider it for the purposes of

this motion to dismiss. Plaintiffs have additionally attached

declarations from Phillip A. Mastagni and Will M. Yamata to their

opposition to this motion to dismiss, and defendants object to

these declarations as improper evidence that should not be before

the court on a motion to dismiss. (See Defs.’ Reply Attachs. 1 &

2.) The court will not consider the declarations or attached

evidence in the form of correspondence with defendants. These

are not documents incorporated by reference in the complaint, nor

are they facts of which the court may take judicial notice. See

Richie, 342 F.3d at 908. Accordingly, the court cannot consider

such evidence “without converting the motion to dismiss into a

motion for summary judgment,” id., and does not consider such an

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action to be appropriate here.

B. Liability for Breach of Contract

As a general matter, a non-party, or nonsignatory, to a

contract is not liable for a breach of that contract. See, e.g.,

Britton v. Co-op Banking Group, 4 F.3d 742, 744 (9th Cir. 1993)

(noting that a “contractual right may not be invoked by one who

is not a party to the agreement”); Henry v. Assoc. Indem. Corp.,

217 Cal. App. 3d 1405, 1416-17 (1990) (determining that where

“[t]here was no direct contractual relationship between [the

parties],” there was no basis from which “a breach of contract

action could properly spring . . .” (citing Gruenberg v. Aetna

Ins. Co., 9 Cal. 3d 566 (1973))); Egan v. Mutual of Omaha

Insurance Company, 24 Cal. 3d 809, 824 (1979) (concluding that,

when two insurance agents who were not parties to an insurance

contract were sued for a breach of the covenant of good faith and

fair dealing on that contract, “[b]ecause the only ground for

imposing liability on either [agent] is breach of that promise,

the judgments against them as individuals cannot stand . . .”).

 Notwithstanding the above, plaintiffs contend that

defendants could be liable under the terms of the bond if they

were reinsurers who undertook an obligation to insure plaintiffs

after the original bond was signed. “Insurance Code section 620

defines reinsurance as a ‘contract . . . by which an insurer

procures a third person to insure him against loss or liability

by reason of such original insurance.’” Stanford W. Ascherman v.

Gen. Reinsurance Corp., 183 Cal. App. 3d 307, 311 (1986)

(citations omitted). “A reinsurance contract is presumed to be a

contract of indemnity for the benefit of the insurance company;

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the original insured has no interest in it.” Id. In other

words, because the insured is not a party to the reinsurance

contract, the insured cannot recover directly against the

reinsurer. 

There is some indication that a reinsurance contract

with a cut-through endorsement provision may allow the insured to

recover from the reinsurer directly. See Prudential Reinsurance

Co. v. Superior Court, 3 Cal. 4th 1118, 1155 (1992) (Kline, J.,

dissenting) (noting that an insured cannot sue a reinsurer

“absent a cut-through endorsement” provision in the contract). 

However, the plaintiff has not alleged that there was a

reinsurance contract or a cut-through endorsement provision, and

the only contract attached to the complaint and referenced

therein is the one between plaintiffs and defendant F&D. Thus,

plaintiffs’ argument that the non-F&D defendants may be liable

for breach of reinsurance contracts fails because the absence of

allegations in the complaint, along with conclusory arguments

that contradict the actual contract and allegations in the

complaint, suggest that plaintiffs have not stated a claim on

which relief can be granted upon that theory. See Steckman, 143

F.3d at 1295. 

Alternatively, plaintiffs allege in their complaint

that the non-F&D defendants are agents and/or partners of

defendant F&D. “Under California law, an insurance agent cannot

be held liable for breach of contract or breach of the implied

covenant of good faith and fair dealing because he is not a party

to the insurance contract.” Minnesota Mut. Life Ins. Co. v.

Ensley, 174 F.3d 977, 981 (9th Cir. 1999) (citing Gruenberg v.

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Aetna Ins. Co., 9 Cal. 3d 566 (1973); Henry v. Assoc. Indemnity

Corp., 217 Cal. App. 3d 1405, 1416-17 (1990)). Therefore, it

does not appear that the non-F&D defendants can be liable for

breach of contract as agents of defendant F&D. 

However, under certain circumstances, a partner to a

contracting party may be liable for breach of the contract. A

partner who enjoys the fruits of the contract and acquiesces to

being bound by the acts of its partner may be liable for breach

of contract. See DeSantis v. Miller Petroleum Co., 29 Cal. App.

2d 679, 683-84 (1938) (finding that a partner was not liable for

breach of contract “when the third party has notice that the

partner endeavoring to bind the partnership does not have

authority to do so . . .”). There is no factual basis in the

complaint or in the bond agreement, however, to support

plaintiff’s bald assertion that the non F&D defendants were

partners of F&D. 

The court need not accept plaintiffs’ allegations of a

partnership between the non-F&D defendants as true. They are not

factual allegations that would support the application of

California law to find liability, but legal conclusions the court

need not credit on a motion to dismiss. See Clegg v. Cult

Awareness Network, 18 F.3d 752, 755 (9th Cir. 1994) (“[T]he court

is not required to accept legal conclusions cast in the form of

factual allegations if those conclusions cannot reasonably be

drawn from the facts alleged.”). With only these conclusory

allegations as a basis for their breach of contract claim,

plaintiffs have failed to state a claim against defendants other

than the defendant F&D, and the complaint must be dismissed as

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against them. See Malviya v. City of San Jose, No. 05-5427, 2006

WL 2529511, at *3 (N.D. Cal. Aug. 31, 2006) (granting a motion to

dismiss when the plaintiff made “‘[b]ald assertions and

conclusions of law,’ without factual allegations giving rise to

any inference” that the defendants violated the plaintiff’s

rights); Nuevo Mundo Holdings v. Pricewaterhouse Coopers LLP, No.

03-613, 2004 WL 112948, at *6 (S.D.N.Y. Jan. 22, 2004) (finding

the plaintiffs’ “conclusory allegations that [certain defendants]

were ‘agents’ of [other defendants], because they represented

themselves as part of defendants . . .” insufficient to state a

claim); Sever v. Glickman, 298 F. Supp. 2d 267, 272 (D. Conn.

2004) (dismissing a breach of contract claim against one

defendant when the complaint contained only conclusory

allegations that the defendant “arranged” the contract between

the parties and was authorized to do so, and no supporting

factual allegations).

Finally, the court must determine whether to grant

plaintiffs leave to amend the complaint to cure these fatal

defects. This is because, when granting a motion to dismiss, a

“district court should grant leave to amend even if no request to

amend the pleading was made, unless it determines that the

pleading could not possibly be cured by the allegation of other

facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en

banc) (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir.

1995)). The court cannot say with certainty that the defects in

the complaint are incurable, and therefore grants plaintiff leave

to amend the complaint. 

///

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IT IS THEREFORE ORDERED that defendants’ motion to

dismiss all defendants except defendant Fidelity and Deposit

Company of Maryland be, and the same hereby is, GRANTED.

Plaintiffs are given 30 days from the date of this order to file

an amended complaint consistent with this order. 

DATED: September 26, 2006

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