Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_10-cv-01442/USCOURTS-caed-2_10-cv-01442-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

LINCOLN GENERAL INSURANCE

COMPANY, a Pennsylvania

corporation,

NO. CIV. S-10-1442 FCD/EFB

Plaintiff,

v. MEMORANDUM AND ORDER

TRI COUNTIES BANK, a

California corporation,

inclusive,

Defendant.

_____________________________/

----oo0oo----

Plaintiff Lincoln General Insurance Company (“plaintiff” or

“Lincoln”) acted as surety for third party Sanderson Company Inc.

(“Sanderson”) for construction of a subdivision. Defendant Tri

Counties Bank (“defendant” or “TCB”) allegedly entered into an

agreement with plaintiff to set aside funds to back a bond

plaintiff issued on behalf of Sanderson. Plaintiff brings the

instant suit against TCB, alleging defendant wrongfully refused

to disburse the funds it agreed to set aside for plaintiff. 

Plaintiff brings claims against defendant for breach of contract,

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1 Because oral argument will not be of material

assistance, the court orders this matter submitted on the briefs. 

E.D. Cal. L.R. 230(g).

2

conversion, and declaratory relief. Pending before the court is

defendant’s motion to dismiss plaintiff’s complaint pursuant to

Federal Rule of Civil Procedure 12(b)(6). Plaintiff opposes the

motion.1

For the reasons set forth below, defendant’s motion is

DENIED.

BACKGROUND

Sanderson is an Oregon corporation that planned to develop

and construct a subdivision called The Vineyard at Anderson in

Anderson, California (the “Project”). (Compl., filed June 10,

2010, ¶ 8.) In order to fund that development, Sanderson secured

a revolving line of credit in the amount of $6,000,000 from

defendant with a total estimated construction cost of $7,912,500. 

(Id. at ¶ 8, Ex. A.)

Before proceeding with the Project, Sanderson was required

by law to obtain a bond guaranteeing the construction of all

public subdivision improvements. See Cal. Gov’t. Code § 66462. 

On or about May 17, 2006, Lincoln issued Performance Bond No.

661117506 (the “Bond”) to guarantee the construction of public

improvements involved in the Project. (Compl., ¶ 12, Ex. B.) 

The City of Anderson was the Bond obligee. (Id. at ¶ 13.)

Before it issued the Bond, on or before April 17, 2006,

Lincoln received a Set Aside Agreement from defendant. (Id. at ¶

10.) The Agreement stated, in relevant part:

In consideration of the executing by [Lincoln] bond(s)

in the amount of $444,287.00 on behalf of [Sanderson],

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we agree upon recordation to set aside from the 

construction funds a sum in the amount of your bond(s)

to be used in paying for those off site improvements in

this tract guaranteed to the Obligee under the terms

of the subdivision bond(s).

(Id. at Ex. B.) The Set Aside Agreement also called for

defendant to create an acount to contain the funds set aside

pursuant to the agreement (“Set Aside Funds”) and mandated a

method of disbursing the funds. (Id.) The Agreement provided:

“[i]n the event [Sanderson] fail(s) to complete and pay for said

off site improvements, all funds remaining in said impound

account shall be immediately available for [Lincoln] to complete

and pay for the cost of said improvements.” (Id.) The Agreement

stated further that it constituted “an irrevocable commitment of

funds” and that “said funds are for the benefit of the Surety

Company in connection with the Surety’s liability under the above

bonds.” (Id.)

Ultimately, Sanderson failed to complete the improvements

guaranteed by the Bond, and the City of Anderson made demand on

Lincoln’s Bond. (Id. at ¶ 14.) In response to the demand on the

Bond, Lincoln requested all remaining Set Aside Funds, but

defendant has refused to provide the funds. (Id. at ¶¶ 16-18.) 

The City of Anderson eventually filed suit against Lincoln to

enforce the Bond, and Lincoln recently incurred liability in

settling that suit. (Id. at ¶ 19.) Therefore, Lincoln alleges

it has been damaged as a result of defendant’s failure to provide

any of the Set Aside Funds guaranteed by the Agreement. (Id. at

¶ 20.)

///

///

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STANDARD

Under Federal Rule of Civil Procedure 8(a), a pleading must

contain “a short and plain statement of the claim showing that

the pleader is entitled to relief.” See Ashcroft v. Iqbal, 129

S. Ct. 1937, 1949 (2009). Under notice pleading in federal

court, the complaint must “give the defendant fair notice of what

the claim is and the grounds upon which it rests.” Bell Atlantic

v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations

omitted). “This simplified notice pleading standard relies on

liberal discovery rules and summary judgment motions to define

disputed facts and issues and to dispose of unmeritorious

claims.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002).

On a motion to dismiss, the factual allegations of the

complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319,

322 (1972). The court is bound to give plaintiff the benefit of

every reasonable inference to be drawn from the “well-pleaded”

allegations of the complaint. Retail Clerks Int’l Ass’n v.

Schermerhorn, 373 U.S. 746, 753 n.6 (1963). A plaintiff need not

allege “‘specific facts’ beyond those necessary to state his

claim and the grounds showing entitlement to relief.” Twombly,

550 U.S. 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.” Iqbal, 129 S. Ct. at 1949. 

Nevertheless, the court “need not assume the truth of legal

conclusions cast in the form of factual allegations.” United

States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n.2 (9th

Cir. 1986). While Rule 8(a) does not require detailed factual

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allegations, “it demands more than an unadorned, the defendantunlawfully-harmed-me accusation.” Iqbal, 129 S. Ct. at 1949. A

pleading is insufficient if it offers mere “labels and

conclusions” or “a formulaic recitation of the elements of a

cause of action.” Twombly, 550 U.S. at 555; Iqbal, 129 S. Ct. at

1950 (“Threadbare recitals of the elements of a cause of action,

supported by mere conclusory statements, do not suffice.”). 

Moreover, it is inappropriate to assume that the plaintiff “can

prove facts which it has not alleged or that the defendants have

violated the . . . laws in ways that have not been alleged.” 

Associated Gen. Contractors of Cal., Inc. v. Cal. State Council

of Carpenters, 459 U.S. 519, 526 (1983). 

Ultimately, the court may not dismiss a complaint in which

the plaintiff has alleged “enough facts to state a claim to

relief that is plausible on its face.” Iqbal, 129 S. Ct. at 1949

(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 554, 570

(2007)). Only where a plaintiff has failed to “nudge [his or

her] claims across the line from conceivable to plausible,” is

the complaint properly dismissed. Id. at 1952. While the

plausibility requirement is not akin to a probability

requirement, it demands more than “a sheer possibility that a

defendant has acted unlawfully.” Id. at 1949. This plausibility

inquiry is “a context-specific task that requires the reviewing

court to draw on its judicial experience and common sense.” Id.

at 1950.

In ruling upon a motion to dismiss, the court may consider

only the complaint, any exhibits thereto, and matters which may

be judicially noticed pursuant to Federal Rule of Evidence 201. 

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See Mir v. Little Co. Of Mary Hospital, 844 F.2d 646, 649 (9th

Cir. 1988); Isuzu Motors Ltd. V. Consumers Union of United

States, Inc., 12 F. Supp. 2d 1035, 1042 (C.D. Cal. 1998). 

ANALYSIS

A. Breach of Contract

Defendant moves to dismiss plaintiff’s breach of contract

claim, asserting that it fails, as a matter of law, because there

is no valid contract between the parties. More specifically,

defendant contends that it is fatal to plaintiff’s claim that the

Set Aside Agreement, while signed by TCB, was not signed by

either plaintiff or Sanderson. As reflected in Exhibit B

attached to plaintiff’s complaint, the Set Aside Agreement

provided a signature line for the “Principal,” which the parties

agree is Sanderson, stating above the signature line “WE

ACKNOWLEDGE, ACCEPT AND AGREE TO COMPLY WITH THE FOREGOING

CONDITION.” The Agreement also provided a signature line for

plaintiff, stating above the line: “Acknowledged and Accepted:

[Lincoln].” Plaintiff does not dispute that the contract was not

signed by it or Sanderson. Instead, plaintiff emphasizes that

said signatures were not necessary to create a binding contract

between the parties, as alleged in the complaint and as provided

by California law.

California Civil Code § 1550 provides that a contract exists

when there are “(1) [p]arties capable of contracting; (2) [the

parties give] [t]heir consent; (2) [there is a] lawful object;

and (4) [s]ufficient cause or consideration.” Here, the

allegations of the complaint establish that the Set Aside

Agreement is a contract entered into between consenting

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2 The cases cited by defendant, Santa Clara-San Benito

Chapter of the Nat’l Elec. Contractors’ Ass’n, Inc. v. Local

Union No. 332 of the Int’l B’hood of Elec. Workers, 40 Cal. App.

3d 431 (1974) and Helperin v. Guzzardi, 108 Cal. App. 2d 125

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corporations for a lawful purpose and supported by consideration

as described in the Set Aside Agreement. Contrary to defendant’s

protestations, the Agreement did not lack the required

manifestation of assent because it was not signed by Lincoln and

Sanderson. The Agreement did not indicate that assent to the

contract could only come by signing the contract. Indeed, it is

well-settled California law, that manifestations of assent may

come in multiple forms and need not take the form of a signature. 

Rather, contract formation merely requires a manifestation of

assent by an act or omission through which a party intends to

show consent. Cal. Civ. Code § 1581; Binder v. Aetna Life Insur.

Co., 75 Cal. App. 4th 832, 850 (1999) (holding that consent to a

contract may be manifested by conduct). 

Here, plaintiff’s issuance of the Bond was its manifestation

of consent to the terms of the Set Aside Agreement, sufficient to

allege a binding contract with defendant. See e.g. Devencenzi v.

Donkonics, 170 Cal. App. 2d 513, 518 (1959) (recognizing that the

existence of a signature line on a proposed contract did not

require the party to actually sign the contract to manifest its

assent since the “signing of the letter was [not] a ‘condition’

or only ‘mode of acceptance” permitted by the statute [Cal. Civ.

Code § 1582]”); Anchor Casualty Co. v. Surety Bond Savings and

Loan Ass’n, 204 Cal. App. 2d 175, 182 (1962) (holding that proof

of the validity of the set aside agreement there was found in the

existence of the surety bond).2

 Similarly, in this case, on its

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(1951), are inapposite. There, the issue was authority to

contract--whether the contracting parties were authorized to

enter the subject contracts. Here, the issue is whether the

parties consented/accepted the contract.

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face, the Set Aside Agreement does not forth an exclusive method

through which the parties may communicate their assent. 

Plaintiff has alleged facts demonstrating its consent to the

contract, and the court must assume the truth of those

allegations for purposes of this motion. Fed. R. Civ. P.

12(b)(6). 

Likewise, it is not fatal to plaintiff’s breach of contract

claim that Sanderson did not sign the contract. Again, under the

facts alleged in the complaint, nothing expressly required

Sanderson’s signature, and to the extent Sanderson’s consent was

required (which plaintiff disputes), plaintiff has alleged

Sanderson’s assent to the contract, via its purchase of the Bond

from Lincoln, knowing Lincoln required the Set Aside Agreement.

Accordingly, defendant’s motion to dismiss on this ground must be

DENIED. 

Defendant alternatively argues that plaintiff cannot

establish a breach of contract claim because the contract is

invalid since there was no recordation of the Bond. Plaintiff

disputes that such recordation was required, arguing under

California law, it is not mandated. Instead, plaintiff asserts

the contract required only recordation of the Deed of Trust,

which did occur. The parties’ arguments raise a factual dispute

that cannot be resolved on a Rule 12(b)(6) motion to dismiss. 

For purposes of the instant motion, as set forth above, plaintiff

has alleged sufficient facts to establish a binding contract with

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defendant, which plaintiff further alleges defendant breached in

failing to disburse the Set Aside Funds. Such allegations are

sufficient to state a breach of contract claim, and thus,

defendant’s motion is properly DENIED with respect to this claim

for relief.

B. Conversion

Defendant moves to dismiss plaintiff’s conversion claim,

arguing similar to the above, that because there is no contract

between defendant and plaintiff, plaintiff’s conversion claim

likewise fails as a matter of law. Conversion is the wrongful

exercise of control over the property of another. To state a

claim for conversion, a plaintiff must allege: (1) its ownership

or right to possess the subject property; (2) the defendant’s

conversion by a wrongful act or disposition of the property; and

(3) damages. Spates v. Dameron Hospital Ass’n, 114 Cal. App. 4th

208, 221 (2003). Defendant contends that plaintiff has no

cognizable property right because the Set Aside Agreement is not

a valid contract. However, as set forth above, the court finds

that plaintiff has adequately alleged a breach of contract claim

against defendant, and for the same reasons as described above,

plaintiff likewise alleges ownership and the right to possess the

Set Aside Funds.

As defendant concedes, plaintiff has also otherwise

adequately stated the additional elements of a conversion claim. 

While a generalized claim for money is not actionable as

conversion, if however, there is a specific, identifiable sum

involved, such as where an agent accepts a sum of money to be

paid to another and fails to make the payment, a cause of action

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for conversion exists. Gulf Insur. Co. v. First Bank, 2008 WL

2383927, *2 (E.D. Cal. June 4, 2008). This court has repeatedly

held that funds identified in a set aside agreement may

constitute such a specific and identifiable sum. Harford Fire

Insur. Co. v. Westamerica Bank, No. 09-2451 JAM/DAD, Order

Denying Defendant’s Motion to Dismiss, filed Jan. 25, 2010

(denying a set aside lender’s motion to dismiss a surety’s

conversion claim on the grounds that the “funds identified in the

set aside letter may constitute a specific and identifiable sum”

sufficient to serve as the basis for a claim of conversion); Gulf

Insur. Co. v. First Bank, No. 08-209 LKK/JFM, Order, filed June

4, 2008 (denying the set aside lender’s motion to dismiss a

surety’s conversion claim on the ground that the set aside funds

described by plaintiff as the “undisbursed balance of loan funds”

may serve as the basis for a claim of conversion); accord

Travelers Casualty and Surety Co. Of Amer. V. RBC Centura Bank,

2008 WL 1925017, *2 (E.D. Cal. April 29, 2008).

Even where the ownership interest in the property is

conditioned on default, once the condition has been met, this is

sufficient possessory interest to support a cause of action for

conversion. Gulf Insur. Co., 2008 WL 2383927 at *3. Here,

plaintiff’s entitlement to the Set Aside Funds that were

allegedly converted was contingent on Sanderson’s default. 

Plaintiff has alleged that condition was met, thus triggering

entitlement to funds that were wrongfully converted by defendant,

causing plaintiff damages. Plaintiff has sufficiently alleged an

interest in the Set Aside Funds to survive the motion to dismiss. 

Accordingly, defendant’s motion to dismiss the claim of

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conversion is DENIED.

C. Declaratory Relief

Defendant moves to dismiss this claim, arguing it is

redundant of plaintiff’s breach of contract claim. Plaintiff

concedes that point. However, plaintiff is correct that it may

plead inconsistent theories of recovery in its complaint. Fed.

R. Civ. P. 8(a)(3). If plaintiff does not prevail on its breach

of contract claim, establishing a valid contract between it and

defendant, it may still seek a declaration of rights,

establishing its entitlement to the Set Aside Funds based on a

non-contractual theory (i.e., promissory estoppel or fraud). 

Accordingly, the court likewise DENIES defendant’s motion to

dismiss this claim.

CONCLUSION

For the foregoing reasons, defendant’s motion to dismiss

plaintiff’s complaint is DENIED in its entirety. 

IT IS SO ORDERED. 

DATED: August 5, 2010

 

FRANK C. DAMRELL, JR.

UNITED STATES DISTRICT JUDGE

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