Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_11-cv-00510/USCOURTS-azd-2_11-cv-00510-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Gilbert Unified School District No. 41, 

Plaintiff, 

vs.

CrossPointe, LLC; Joan M. Keebler, 

Defendants. 

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No. CV 11-00510-PHX-NVW

ORDER

Before the Court is Defendants’ Motion to Dismiss Second Amended Complaint

Pursuant to Fed. R. Civ. P. 12(b)(6). (Doc. 41.) Plaintiff Gilbert Unified School District

No. 41’s request for oral argument will be denied because its written briefing is sufficient

and oral argument would not aid determination of the motion. See Fed. R. Civ. P. 78(b);

Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998).

I. Legal Standard

Dismissal under Fed. R. Civ. P. 12(b)(6) can be based on “the lack of a cognizable

legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.” 

Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). To avoid dismissal,

a complaint must contain “only enough facts to state a claim for relief that is plausible on

its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial

plausibility when the plaintiff pleads factual content that allows the court to draw the

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The Amended Complaint and the December 9, 2011 Order used the term “February

14, 2008 Contract” to refer to a contract allegedly formed by the District accepting Defendant

CrossPointe, LLC’s proposal (“Proposal”) in response to the District’s Request for Proposals

(“RFP”) and which incorporates the terms of the RFP and the Proposal. The Second

Amended Complaint refers to this alleged contract both as the “February 14, 2008 Contract”

and “the Contract.” Here, it is consistently referred to as the “February 14, 2008 Contract”

to distinguish it from the Master License Agreement signed by the District’s assistant

superintendent, Clyde R. Dangerfield, Esq., on February 20, 2008, and by Defendant Joan

Keebler as Chief Executive Officer for CrossPointe on February 26, 2008.

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reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.

Iqbal, __ U.S. __, 129 S. Ct. 1937, 1949 (2009). 

The principle that a court accepts as true all of the allegations in a complaint does

not apply to legal conclusions or conclusory factual allegations. Id. at 1949, 1951. 

“Threadbare recitals of the elements of a cause of action, supported by mere conclusory

statements, do not suffice.” Id. at 1949. “A plaintiff’s obligation to provide the grounds

of his entitlement to relief requires more than labels and conclusions, and a formulaic

recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. 

II. Background

On December 9, 2011, after briefing and oral hearing, the District’s claims for

conspiracy to defraud and fraudulent inducement to enter into the February 14, 2008

Contract1

 were dismissed under the economic loss doctrine. (Doc. 36.) The District’s

claims for breach of the February 14, 2008 Contract and breach of the duty of good faith

and fair dealing arising under the February 14, 2008 Contract were not dismissed. (Id.) 

The December 9, 2011 Order states in detail facts assumed to be true for purposes of

deciding the first motion to dismiss, including lengthy quotes from documents attached to

or referenced by the Amended Complaint, which will not be repeated here. 

On January 13, 2012, the District filed its Second Amended Complaint. (Doc. 38.) 

The Second Amended Complaint alleges four claims against CrossPointe: (1) breach of

the February 14, 2008 Contract; (2) breach of the Master License Agreement; (3) breach

of the duty of good faith and fair dealing arising under the February 14, 2008 Contract or

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the Master License Agreement; and (4) “contract rescission” because “Keebler’s

common-law and procurement fraud induced the District to enter into the February 14,

2008 Contract.” In addition, the Second Amended Complaint alleges a claim against

Keebler personally for fraudulent inducement to enter into the February 14, 2008

Contract.

Defendants now move to dismiss the District’s claim against CrossPointe for

contract rescission and the claim against Keebler personally for fraudulent inducement as

barred by the economic loss doctrine and for failure to plead with sufficient specificity.

III. Analysis

A. The District’s Fifth Claim Will Not Be Dismissed.

CrossPointe moves to dismiss the District’s Fifth Claim because rescission is a

remedy, not a cause of action. The Fifth Claim, identified as “a contract action for

rescission,” alleges that the District was fraudulently induced to enter into the February

14, 2008 Contract, the software and services the District received were worthless, and the

District has a right to rescind the February 14, 2008 Contract and recover restitution of all

amounts it paid to CrossPointe. The First Claim alleges that CrossPointe materially

breached the February 14, 2008 Contract by failing to supply the software and services

promised, thereby causing the District general, consequential, and incidental damages. 

The First and Fifth Claims are both pled as contract actions for breach of the February 14,

2008 Contract, one seeking damages and the other seeking rescission and restitution. The

Second Amended Complaint has one prayer for relief, which seeks judgment “[a]gainst

CrossPointe, for general, consequential, incidental, and other damages for breach of

contract and bad faith” and “[a]lternatively, against CrossPointe, for rescission of the

February 14, 2008 Contract and restitution.” Although it is not necessary to plead two

separate claims in order to seek alternative remedies, doing so appears to be harmless

duplication. Therefore, the District’s Fifth Claim will not be dismissed.

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B. The District’s Fourth Claim Will Be Dismissed Without Leave to

Amend.

1. The District’s Fourth Claim Does Not Satisfy Fed. R. Civ. P.

9(b).

Certain elements of fraud claims must satisfy a higher standard of pleading under

the Federal Rules of Civil Procedure. In alleging fraud or mistake, a party may allege

malice, intent, knowledge, and other conditions of a person’s mind generally, but must

allege the circumstances constituting fraud or mistake with particularity. Fed. R. Civ. P.

9(b). Rule 9(b) requires allegations of fraud to be “specific enough to give defendants

notice of the particular misconduct which is alleged to constitute the fraud charged so that

they can defend against the charge and not just deny that they have done anything

wrong.” Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001). Plaintiffs alleging

fraud “must state the time, place, and specific content of the false representations as well

as the identities of the parties to the misrepresentations.” Schreiber Distrib. Co. v. ServWell Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). 

Moreover, to state a claim for common law fraud under Arizona law, a plaintiff

must plead nine elements: 

(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker’s

knowledge of its falsity or ignorance of its truth; (5) the speaker’s intent

that it be acted upon by the recipient in the manner reasonably

contemplated; (6) the hearer’s ignorance of its falsity; (7) the hearer’s

reliance on its truth; (8) the hearer’s right to rely on it; (9) the hearer’s

consequent and proximate injury. 

Comerica Bank v. Mahmoodi, 224 Ariz. 289, 291-92, 229 P.3d 1031, 1033-34 (Ct. App.

2010); see Swartz v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007) (affirming dismissal

of common-law fraud claim for failure to plead reasonable reliance as required by state

law). 

The Second Amended Complaint alleges that Keebler made at least four false

representations in CrossPointe’s January 10, 2008 Proposal to the District: 

1. “[N]o customer has failed in their efforts to implement and utilize the

features and benefits of our application suite.”

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2. “CrossPointe is currently deployed and operating in a number of

states and is complying with all state requirements. The CrossPointe

database . . . can meet the reporting requirements of the State of Arizona.”

3. “CrossPointe Schools OnLine [will] easily meet [Arizona] SAIS

extraction and reporting requirements.”

4. “CrossPointe’s staff has years of experience in converting large

school districts (greater than 100,000 students) with legacy student systems,

such as Pearson’s CIMS system, to CrossPointe’s products including

training all key stakeholders.”

The District alleges that the first statement is false because another school district had

sued CrossPointe alleging that the student information system and software had failed. 

The fact that another district made allegations is not evidence that the allegations were

true. 

The second and third statements predict that CrossPointe’s software can and will

meet Arizona state reporting requirements. They may be contractual promises later

breached, but no factual allegation supports the District’s naked allegation that these

promises were made with the present intention not to perform. Moreover, the District

knew at the time they were made that the software did not meet Arizona state reporting

requirements and would require custom design and development to do so. 

The District alleges the fourth statement is false because “[t]he CrossPointe staff

assigned to the District’s project did not have years of experience converting large school

districts with Pearson’s CIMS system to CrossPointe’s products, nor did the staff have

years of experience training key stakeholders.” The fourth statement asserts that

“CrossPointe’s staff has years of experience,” not that the staff who would be assigned to

the District’s project would have years of experience. 

Thus, the Second Amended Complaint does not plead facts that support its

conclusions that each of the four statements was false and Keebler knew that each

representation was false or was ignorant of the truth of the representations when they

were incorporated into the Proposal. Further, the Second Amended Complaint includes

only threadbare recitals of the other seven elements of common-law fraud. Leave to

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amend the Fourth Claim would be granted if the economic loss doctrine did not make

further amendment futile.

2. The Economic Loss Doctrine Bars the District’s Fourth Claim.

Defendants contend that the District’s Fourth Claim against Keebler for fraudulent

inducement is barred by the economic loss doctrine, which limits a contracting party to

contractual remedies for the recovery of purely economic loss unaccompanied by physical

injury to persons or other property. See Flagstaff Affordable Housing Limited

Partnership v. Design Alliance, Inc., 223 Ariz. 320, 323, 223 P.3d 664, 667 (2010). 

Arizona law defines “economic loss” as “pecuniary or commercial damage, including any

decreased value or repair costs for a product or property that is itself the subject of a

contract between the plaintiff and defendant, and consequential damages such as lost

profits.” Id.

Application of the economic loss doctrine depends on context-specific policy

considerations. Id. at 325, 223 P.3d at 669. Contract law “seeks to encourage parties to

order their prospective relationships, including the allocation of risk of future losses and

the identification of remedies, and to enforce any resulting agreement consistent with the

parties’ expectations.” Id. Tort law promotes safety by deterring accidents and spreads

the loss from accidents. Id. In certain contexts, the policies of accident deterrence and

loss-spreading will not require permitting tort recovery in addition to contract remedies,

and “the policies of the law generally will be best served by leaving the parties to their

commercial remedies.” Id. at 669-70.

Here, as previously found, both the District and CrossPointe were sophisticated

and of equal bargaining power. They anticipated a possible breach of their commercial

contract and ordered their prospective relationship, including allocating risks and

identifying remedies. The District seeks recovery of purely economic loss

unaccompanied by physical injury to persons or other property. Permitting recovery in

tort would not promote safety or spread the loss from accidents. Thus, the economic loss

doctrine limits the District to contractual remedies for its purely economic loss.

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Moreover, casting the fraud claim as fraudulent inducement does not avoid the

economic loss doctrine because the allegedly false statements made to induce the District

to enter into the February 14, 2008 Contract are part of the contract itself. Even if the

statements were false, they are incorporated into the February 14, 2008 Contract as

contractual promises for which there are contractual remedies if breached. 

Focusing the District’s fraudulent inducement claim on Keebler personally instead

of on CrossPointe does not avoid the economic loss doctrine, even though Keebler is not

a party to a contract with the District. Although the Arizona courts have not addressed

this specific issue in a published opinion, the policy considerations identified in Flagstaff

support applying the economic loss doctrine to preclude tort recovery against a corporate

officer of the contracting party where it precludes tort recovery against the corporate

contracting party. See Ben-Yishay v. Mastercraft Dev. LLC, 553 F. Supp. 2d 1360, 1370

(S.D. Fla. 2008); Foxworthy, Inc. v. CMG Life Servs., Inc., No. CV11-2682, 2012 WL

1269127, at *2-4 (N.D. Ga. April 16, 2012).

In Ben-Yishay, the plaintiff’s claims for fraudulent misrepresentation did not give

rise to an independent cause of action in tort against a member and officer of the

contracting entity because the representations were inseparable from the essence of the

contractual agreement and the rationale for applying the economic loss doctrine applied

whether the tort claims were asserted against the contracting entity or the corporate

officer:

This analysis is not affected by the fact that Lap, a member of Mastercraft

and officer of MS, was not a signatory of the Agreements. The rationale of

the economic loss rule is to limit a party to the recovery of purely economic

damages suffered in a contractual setting. This rationale, which limits the

Ben-Yishays to the damages recoverable from breach of the Agreements,

applies with equal force whether the fraudulent inducement and

misrepresentation claims are asserted against Mastercraft and MS, or

against Lap. To find otherwise would lead to the incongruous result that the

economic loss rule would bar applicable tort claims against a corporation,

but not against the directors or officers who negotiated the agreement. Such

an outcome would be inconsistent with the rationale of the economic loss

rule and would eviscerate its application in cases where a corporation is a

party to the agreement. . . . Given that a corporation can only act through

its employees, it would completely undermine the contractual privity

economic loss rule to allow any party which contracts with a corporation to

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Italics in the original.

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avoid the rule by simply bringing its tort claim directly against the corporate

officers or employees tasked with performing the contract on behalf of the

corporation.

553 F. Supp. 2d at 1371 (internal quotation marks and citations omitted); accord

Foxworthy, 2012 WL 1269127, at *2-4 (applying economic loss doctrine to tort claims

against members and officers of the contracting entity who acted on behalf of the

contracting entity).

Here, too, the alleged misrepresentations are “inseparable from the essence of the

contractual agreement.” See Ben-Yishay, 553 F. Supp. 2d at 1370-71. The Second

Amended Complaint alleges that CrossPointe materially breached the February 14, 2008

Contract by failing to develop and install a student information system that functioned

properly and would enable the District to meet the Arizona Student Accountability

Information System (“SAIS”) reporting requirements. It further alleges that Keebler

made misrepresentations in CrossPointe’s Proposal, which is a part of the February 14,

2008 Contract. The misrepresentations include stating that CrossPointe’s student

information system would easily meet SAIS requirements and its database could meet

Arizona’s reporting requirements. 

Further, Keebler acted as an officer of and on behalf of CrossPointe. The Second

Amended Complaint alleges that “Keebler authored these representations” by

communicating them “to other CrossPointe employees with the intent that they would

communicate the representations to the District to induce the District to enter the

Contract,” “CrossPointe, in fact, published the representations to the District,” “Keebler

participated in communicating the representations to the District by signing the RFP

submission letter to the District,” and “[i]n the letter, Keebler represented to the District

that she had personal knowledge of the proposal’s contents, and she expressly authorized

the representations in the proposal” as chief executive officer of CrossPointe.2

 The

Second Amended Complaint alleges that “CrossPointe knowingly incorporated Keebler’s

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fraudulent representations into the proposal CrossPointe submitted in response to the

RFP” and “Keebler’s fraudulent representations became CrossPointe’s fraudulent

representations.” 

Therefore, the economic loss doctrine bars the District’s fraudulent inducement

claim against Keebler because the allegedly false representations are inseparable from the

essence of the contractual agreement between the District and CrossPointe, Keebler made

them as CrossPointe’s chief executive officer on behalf of CrossPointe, and the doctrine

would bar a fraudulent inducement claim against CrossPointe on the alleged facts. The

District may not circumvent the economic loss doctrine, which bars tort recovery from

CrossPointe, by asserting tort claims against its chief executive officer, who acted on

behalf of CrossPointe and whose allegedly false statements were adopted by CrossPointe. 

Leave to amend should be freely given “when justice so requires.” Fed. R. Civ. P.

15(a)(2). Factors to be considered when deciding whether to grant leave to amend

include the repeated failure to cure deficiencies by previous amendment and the futility of

further amendment. Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th Cir.

1989). The district court’s discretion to deny leave to amend a complaint is “especially

broad” where the plaintiff already has had one or more opportunities to amend his

complaint. Ascon Properties, Inc. v. Mobil Oil Co., 866 F.2d 1149, 1161 (9th Cir. 1989). 

“Leave to amend need not be given if a complaint, as amended, is subject to dismissal.” 

Moore, 885 F.2d at 538. Because further amendment of Plaintiff’s Fourth Claim would

be futile, it will be dismissed without leave to amend.

IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss Second

Amended Complaint Pursuant to Fed. R. Civ. P. 12(b)(6) (Doc. 41) is granted in part and

denied in part.

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IT IS FURTHER ORDERED that the Fourth Claim of the Second Amended

Complaint is dismissed without leave to amend.

DATED this 2nd day of May, 2012.

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