Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_08-cv-00209/USCOURTS-caed-2_08-cv-00209-4/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

FOR THE EASTERN DISTRICT OF CALIFORNIA

GULF INSURANCE COMPANY,

NO. CIV. S-08-209 LKK/JFM 

Plaintiff,

v.

O R D E R

FIRST BANK and DOES 1 

through 50, inclusive,

Defendants.

 /

Plaintiff Gulf Insurance has brought suit against defendant

First Bank alleging that defendant has wrongfully refused to

disburse funds it agreed to set aside for plaintiff. Plaintiff has

brought claims for breach of contract, conversion, breach of

fiduciary duty, and subrogation. Pending before the court are

defendant’s motions to dismiss. For the reasons explained below,

the motions are granted in part and denied in part, and leave to

amend is granted.

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 The "background" is derived from the plaintiff's complaint, 1

the allegations of which must be taken as true for disposition of

the instant motion.

2

I. Background1

Plaintiff Gulf Insurance acted as the surety on an improvement

bond for the construction of a 114-lot subdivision in Auburn,

California planned by Baldwin Ranch. FAC ¶¶ 5-6. The county in

which the subdivision was to be located required this bond in order

to guarantee the construction of certain improvements. To induce

Gulf Insurance to act as surety on the bond, Baldwin Ranch

requested that defendant First Bank, which had provided financing

for the construction of the subdivision, set aside funds for Gulf

Insurance. FAC ¶ 9. In the event that Baldwin Ranch failed to

complete the improvements, the agreement -- memorialized in a

September 25, 2002 “set aside letter” -- required First Bank to

provide Gulf Insurance with the undisbursed loan funds so that it

could complete the improvements. FAC ¶ 6. As of the date of the

set aside letter, $3.9 million dollars remained undisbursed. FAC

¶ 11.

Baldwin Ranch subsequently defaulted on certain performance

and payment obligations. FAC ¶ 19. Gulf Insurance alleges that

it is now entitled to the undisbursed balance of the set aside

funds. FAC ¶ 22. On September 26, 2007, Gulf Insurance requested

that First Bank provide an accounting of all accounts and loans for

Baldwin Ranch. FAC ¶ 25. As of April 21, 2008 (the date of the

first amended complaint’s filing), Gulf Insurance had not received

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After the first motion to dismiss was filed, plaintiff added 2

a claim for subrogation. Defendant then filed a second motion to

dismiss directed toward the subrogation claim.

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an accounting or disbursement from First Bank. FAC ¶ 26.

Pending before the court are First Bank’s motions to dismiss,

which seek to dismiss the claims for conversion, breach of

fiduciary duty, subrogation, and declaratory relief. Defendant 2

does not seek dismissal of the breach of contract claim. Plaintiff

has also abandoned its initial claim for punitive damages in the

first amended complaint.

II. Standard

In order to survive a motion to dismiss for failure to state

a claim, plaintiffs must allege "enough facts to state a claim to

relief that is plausible on its face." Bell Atlantic Corp. v.

Twombly, -- U.S. --, 127 S. Ct. 1955, 1974 (2007). While a

complaint need not plead "detailed factual allegations," the

factual allegations it does include "must be enough to raise a

right to relief above the speculative level." Id. at 1964-65. 

The Supreme Court recently held that Federal Rule of Civil

Procedure 8(a)(2) requires a "showing" that the plaintiff is

entitled to relief, “rather than a blanket assertion” of

entitlement to relief. Id. at 1965 n.3. Though such assertions

may provide a defendant with the requisite "fair notice" of the

nature of a plaintiff's claim, the Court opined that only factual

allegations can clarify the "grounds" on which that claim rests.

Id. "The pleading must contain something more. . . than . . . a

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The holding in Twombly explicitly abrogates the well 3

established holding in Conley v. Gibson that, "a complaint should

not be dismissed for failure to state a claim unless it appears

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

support of his claim which would entitle him to relief." 355 U.S.

41, 45-46 (1957); Twombly, 127 S. Ct. at 1968.

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statement of facts that merely creates a suspicion [of] a legally

cognizable right of action." Id. at 1965, quoting 5 C. Wright &

A. Miller, Federal Practice and Procedure, § 1216, pp. 235-36 (3d

ed. 2004).3

On a motion to dismiss, the allegations of the complaint must

be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972).

The court is bound to give the plaintiff the benefit of every

reasonable inference to be drawn from the "well-pleaded"

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

Schermerhorn, 373 U.S. 746, 753 n.6 (1963). In general, the

complaint is construed favorably to the pleader. See Scheuer v.

Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by

Harlow v. Fitzgerald, 457 U.S. 800 (1982). Nevertheless, the court

does not accept as true unreasonable inferences or conclusory legal

allegations cast in the form of factual allegations. W. Mining

Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).

III. Analysis

A. Conversion

A cause of action for conversion requires “(1) the plaintiff's

ownership or right to possession of the property; (2) the

defendant's conversion by a wrongful act or disposition of property

rights; and (3) damages.” Burlesci v. Petersen, 68 Cal. App. 4th

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1062, 1066 (1998).

A generalized claim for money is not actionable as conversion.

Vu v. Cal. Commerce Club, 58 Cal. App. 4th 229, 235 (1997); see

also Farmers Ins. Exch. v. Zerin, 53 Cal. App. 4th 445, 452 (1997)

(“a mere contractual right of payment, without more, will not

suffice”); accord In re Bailey, 197 F.3d 997, 1000 (9th Cir. 1999).

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 for conversion

exists. Burlesci, 68 Cal. App. 4th at 1066; see also Fischer v.

Machado, 50 Cal. App. 4th 1069, 1072-73 (1996). In other words,

“money can only be treated as specific property subject to being

converted when it is ‘identified as a specific thing.’” PCO, Inc.

v. Christensen, Miller, Fink, Jacobs, Glaser, Weil, & Shapiro, LLP,

150 Cal. App. 4th 384, 395 (2007) (quoting Baxter v. King, 81 Cal.

App. 192, 194 (1927)). That said, it is not necessary that “each

coin or bill be earmarked.” Haigler v. Donnelly, 18 Cal. 2d 674,

681 (1941).

Here, First Bank argues that the “undisbursed balance of loan

funds” sought by plaintiff, FAC ¶ 43, does not constitute a

specific, identifiable sum because Baldwin Ranch was never entitled

to receive the full amount of its loan in a lump sum. Instead, as

noted in the set aside letter, Baldwin Ranch was only allowed to

draw down funds periodically, subject to the satisfactory

completion of work. FAC, Ex. 2 (“Lender will make disbursement

from the set aside allocation from time to time upon the written

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 It is immaterial whether the funds at issue were in fact 4

segregated; otherwise, defendants could shield themselves from

liability by simply commingling funds. Instead, the issue is

whether First Bank had an obligation to segregate the funds or to

take similar action. Here, under the terms of the agreement, First

Bank agreed to “allocate and set aside” the funds, which indicates

that they were not to be treated as any other funds in the bank’s

possession, even if there was no express requirement of

segregation.

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authorization of the Borrower . . . for construction of the bonded

improvements . . . but only after Lender is satisfied that the work

paid for has actually been performed.”). Thus, First Bank reasons

that “[u]ntil these loan amounts are draw upon and actually

disbursed, there is nothing that specifically identifies the

undisbursed sums.” Mot. at 13.

The argument is unavailing. The set aside letter provided

that First Bank would “allocate and set aside in the disbursement

budget the sum of not less than $7,759,521.” FAC, Ex. 2. That 4

fixed amount, less money already disbursed, constitutes the

“undisbursed balance of the loan funds” -- a sum that is both

specific and identifiable. 

First Bank’s argument appears to conflate its relationship to

Baldwin Ranch with its relationship to Gulf Insurance. But Gulf

Insurance’s entitlement to the undisbursed funds is not contingent

upon the procedures for disbursements to Baldwin Ranch. Instead,

that entitlement is contingent upon only one condition: whether

Baldwin Ranch “fails to complete or pay for the improvement.” FAC,

Ex. 2. As alleged in the complaint, that condition has been met,

and it therefore triggered Gulf Insurance’s ownership interest in

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the undisbursed funds.

The facts here are similar to those in Travelers Casualty and

Surety Co. of America v. RBC Centura Bank, No. 08-369 GEB/EFB, 2008

WL 1925017 (E.D. Cal. Apr. 28, 2008). There, the surety on an

improvement bond sued the bank with which it had entered into a set

aside agreement. As here, the set aside agreement provided that

if the borrower on the original loan (i.e., the developers of the

construction projects) “failed to complete or pay for the

[i]mprovements, then [the bank] would make available for

disbursement to Plaintiff the [ ] balance of the Set Aside Funds.”

Id. at *1. The borrower then defaulted, but the bank refused to

pay. Under those facts, the court found that plaintiff had

sufficiently stated a cause of action for conversion.

Here, too, Gulf Insurance has sufficiently stated a cause of

action of conversion. It has identified a specific sum of money

in which it has an alleged ownership interest -- not merely a

contractual right of payment. Accordingly, the court denies the

motion to dismiss with respect to conversion.

B. Breach of Fiduciary Duty

The elements for a cause of action for breach of fiduciary

duty are the existence of a fiduciary duty, the breach of that

duty, and damages proximately caused by the breach. Mosier v. S.

Cal. Physicians Ins. Exch., 63 Cal. App. 4th 1022, 1044 (1998).

Whether a fiduciary duty exists is a question of law, whereas

whether a breach has occurred is a question of fact. Amtower v.

Photon Dynamics, Inc., 158 Cal. App. 4th 1582, 1599 (2008).

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Here, First Bank argues that no fiduciary duty existed. A

fiduciary duty can be created by agreement or by special

circumstances. See Comm. on Children’s Television, Inc. v. Gen.

Foods Corp., 35 Cal. 3d 197, 221 (1983) (“[B]efore a person can be

charged with a fiduciary obligation, he must either knowingly

undertake to act on behalf and for the benefit of another, or must

enter into a relationship which imposes that undertaking as a

matter of law.”). The bank argues that, at most, it owed a debt

to Gulf Insurance, just as it owes a debt to anyone who deposits

money into the bank. It is well-settled that the mere act of

depositing money into a bank does not generally create fiduciary

relationship. See Copesky v. Superior Court, 229 Cal. App. 3d 678,

692 (1991) (“[T]he relationship between a bank and its depositor

is not a fiduciary relationship, but that of debtor-creditor”); see

also Price v. Wells Fargo Bank, 213 Cal. App. 3d 465, 476 (1989)

(“A debt is not a trust and there is not a fiduciary relation

between debtor and creditor as such. . . . ”) (internal quotation

marks omitted).

That said, it is also well-settled that an escrow agent owes

a fiduciary duty to the parties to the escrow. Virtanen v.

O’Connell, 140 Cal. App. 4th 688, 702-03 (2006) (“[I]t is hard to

imagine how one can seriously dispute that an escrow holder owes

a fiduciary duty to the parties to the escrow, including the party

who has deposited property into the escrow.”). Although First Bank

was not an escrow agent as such, it could be argued that it

performed a similar function in that it was bound to deliver funds

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to Gulf Insurance (at least upon a triggering event, i.e., Baldwin

Ranch’s default of its obligations).

The court concludes, however, that the relationship between

First Bank and Gulf Insurance is not one that merits protection by

the law of fiduciaries. It is noteworthy that the parties here are

two sophisticated businesses with substantial bargaining power.

See City of Hope Nat’l Med. Ctr. v. Genentech, Inc., 75 Cal. Rptr.

3d 333, 345 (2008). Had the parties desired to enter into a

fiduciary relationship explicit, they could have expressly done so

in the set aside letter. Further, while Gulf Insurance argues that

it lacks knowledge and control over the disbursement budget as

compared to First Bank, the balance of the disbursement budget can

be identified by verifying the amount of funds already received by

Baldwin Ranch. 

Fiduciary obligations “generally come into play when one

party's vulnerability is so substantial as to give rise to

equitable concerns underlying the protection afforded by the law

governing fiduciaries.” Id. Here, the court cannot conclude that

Gulf Insurance’s vulnerability in its relationship with First Bank

was so substantial to warrant such protection. See Reyes v.

Atlantic Richfield Co., 12 F.3d 1464, 1472 (9th Cir. 1993)

(refusing to impose fiduciary duty where there was nothing to

indicate that the relationship was “anything other than an

arms-length business transaction”); First Citizens Fed. Sav. & Loan

Ass’n v. Worthen Bank and Trust Co., N.A., 919 F.2d 510, 514 (9th

Cir. 1990) (“Banks and savings institutions engaged in commercial

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transactions normally deal with one another at arm's length and not

as fiduciaries.”); Copesky, 229 Cal. App. 3d at 691. Accordingly,

the court dismisses the breach of fiduciary duty claim.

C. Subrogation

Gulf Insurance also alleges a claim for subrogation on behalf

of subcontractors and other labor, equipment, and material

suppliers who worked on the improvements. “In general terms,

subrogation is the substitution of one party in place of another

with reference to a lawful claim, demand or right. It is a

derivative right, acquired by satisfaction of the loss or claim

that a third party has against another.” In re Hamada, 291 F.3d

645, 649 (9th Cir. 2002). A subrogation claim requires that the

plaintiff (1) have paid a debt owed to the subrogee in order to

protect plaintiff’s own interest, (2) not have acted as a

volunteer, (3) not be primarily liable for debt, (4) have paid the

entire debt, and (5) show that subrogation would not work an

injustice to the rights of others. Id. at 651.

Because of the derivative nature of subrogation, Gulf

Insurance must first allege facts sufficient to support a finding

that the subcontractors had a valid claim against First Bank. As

Gulf Insurance notes, a construction lender such as First Bank may

be liable to a subcontractor if, for example, a stop notice or

mechanics’ lien is filed. See Nat’l Technican Systems v.

Commercial Contractors, Inc., 89 Cal. App. 3d 1000, 1006 (2001) (“A

‘stop notice’ is a remedy to reach unexpended construction funds

in the hands of the owner or lender, is available on both public

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and private works, and may be served by a claimant other than an

original contractor.”); N. Bay Constr., Inc. v. City of Petaluma,

143 Cal. App. 4th 552, 555 (2006) (mechanics’ lien permits those

who have provided labor or materials in connection with property

to impose lien on property). Here, however, there is no allegation

that any such stop notice or mechanics’ lien was in fact utilized.

Because it is unclear whether or not plaintiff could in fact make

such an allegation, the claim is dismissed with leave to amend if

plaintiff can do so in good faith.

Assuming that plaintiff is able to cure this defect, it must

also allege with greater specificity which subcontractors’ rights

it seeks to enforce. At present, the complaint simply speaks in

generalities about how Gulf Insurance has expended substantial sums

to satisfy claims made by unnamed “subcontractors and/or other

labor, equipment, or material suppliers who performed work and/or

provided materials to the improvements.” FAC ¶ 59. While

plaintiff need not allege a precise accounting of all such claims,

it must at least allege the parties on whose behalf the subrogation

claim is asserted.

Finally, First Bank argues that plaintiff has not alleged that

the debts were paid in full. Gulf Insurance responds, however,

that it received multiple claims by multiple subcontractors -- the

satisfaction of any of which entitles Gulf to subrogation

(assuming, of course, that the other requirements discussed above

are met). Because each separate claim may be subrogated, the court

finds that plaintiff has sufficiently alleged the requirement that

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the debts at issue were paid in full.

D. Declaratory Relief

Finally, defendant argues that plaintiff cannot plead a claim

for declaratory relief. Under California law, declaratory relief

only “operates prospectively, and not merely for the redress of

past wrongs.” Babb v. Superior Court, 3 Cal. 3d 841, 848 (1971)

(quoting Travers v. Louden, 254 Cal. App. 2d 926, 931 (1967)); see

also Roberts v. Los Angeles County Bar Ass’n, 105 Cal. App. 4th

604, 618 (2003). “The purpose of a judicial declaration of rights

in advance of an actual tortious incident is to enable the parties

to shape their conduct so as to avoid a breach.” Babb, 3 Cal. 3d

at 848. At least with respect to the cause of action for breach

of contract, however, there exists a fully matured cause of action

for money damages. See Canova v. Trustees of Imperial Irrigation

Dist. Employee Pension Plan, 150 Cal. App. 4th 1487, 1497 (2007)

(“Where, as here, a party has a fully matured cause of action for

money, the party must seek the remedy of damages, and not pursue

a declaratory relief claim.”). Accordingly, declaratory relief

would be redundant for purposes of the breach of contract claim.

IV. Conclusion

The motion to dismiss is granted in part and denied in part.

Plaintiff is granted ten days leave to amend.

IT IS SO ORDERED. 

DATED: June 4, 2008.

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