Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_04-cv-01986/USCOURTS-caed-2_04-cv-01986-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1330 Breach of Contract

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

ST. PAUL FIRE AND MARINE

INSURANCE COMPANY,

NO. CIV. S-04-1986 LKK/DAD

Plaintiff,

v. O R D E R

NATOMAS UNIFIED SCHOOL 

DISTRICT,

Defendant.

 /

On February 22, 2005, this court issued an order granting, 

with leave to amend, plaintiff’s motion to dismiss defendant’s

negligence counterclaim. Defendant, Natomas Unified School

District (“NUSD” or “the District”), subsequently filed its first

amended counterclaim against plaintiff, St. Paul Fire and Marine

Insurance Company (“St. Paul”), which alleges, inter alia, fraud

and deceit regarding representations made about a takeover

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1 All facts are derived from NUSD’s first amended

counterclaim.

2 NUSD has not named Gen-Con for purposes of service in this

action because of the automatic stay imposed by the bankruptcy

filing. 

2

agreement, fraud and deceit regarding representations made about

a mold remediation program, and negligent misrepresentation

(defendant’s third, fourth, and fifth counterclaims, respectively).

Pending before the court is plaintiff’s motion to dismiss these

three counterclaims.

I.

 FACTS1

On or about August 27, 2001, NUSD entered into a written

contract with Gen-Con, Inc. as a general contractor to construct

the Natomas Middle School No. 2 - phase 2 project. St. Paul served

as the surety and issued separate performance and payment bonds,

in the amount of $11,490,000. Specifically, Bond No. SF6950 was

issued to ensure and guarantee Gen-Con’s complete and faithful

performance of the contract and payment for all labor, materials,

services, and equipment required to complete the project. 

On or about July 15, 2002, after commencing construction on

the project, Gen-Con defaulted under its contract with NUSD and

filed for bankruptcy protection under Chapter 11 of the United

States Bankruptcy Code, in the matter of In Re Gen-Con, Inc., in

the United States Bankruptcy Court, Northern District of

California, Eastern Division, Case No. 02-53885 JRG (“bankruptcy

action”).2 St. Paul initiated an adversary proceeding in the

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bankruptcy court. 

After Gen-Con’s default of the contract, representatives of

Natomas notified St. Paul on numerous occasions, orally and in

writing, of Gen-Con’s default and requested St. Paul’s “immediate

intervention” and action to perform Gen-Con’s duties and

obligations under the contract, and to continue, preserve the

condition of, and complete the project. St. Paul allegedly failed

and refused to take control of, enter upon, and preserve the

condition of the project or otherwise act to complete the project

until NUSD agreed to execute a “takeover agreement.” 

On September 23, 2004, St Paul brought suit against NUSD in

this court, arguing that NUSD breached a number of its duties under

the Takeover Agreement. NUSD answered St. Paul’s complaint in

December 2004, at which point it also alleged several

counterclaims. In February of 2005, St. Paul successfully moved

to dismiss NUSD’s counterclaim for negligence, and the Court

dismissed that counterclaim with leave to amend. NUSD then filed

its first amended counterclaim, with allegations which are at issue

in this motion.

II.

STANDARDS ON A MOTION TO DISMISS UNDER FED. R. CIV. P. 12(b)(6)

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 Intern. Ass'n,

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Local 1625, AFL-CIO v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963).

Thus, the plaintiff need not necessarily plead a particular fact

if that fact is a reasonable inference from facts properly alleged.

See id.; see also Wheeldin v. Wheeler, 373 U.S. 647, 648 (1963)

(inferring fact from allegations of complaint).

In general, the complaint is construed favorably to the

pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). So

construed, the court may not dismiss the complaint for failure to

state a claim unless it appears beyond doubt that the plaintiff

0can prove no set of facts in support of the claim which would

entitle him or her to relief. See Hishon v. King & Spalding, 467

U.S. 69, 73 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46

(1957)). In spite of the deference the court is bound to pay to

the plaintiff's allegations, however, it is not proper for the

court to assume that "the [plaintiff] can prove facts which [he or

she] has not alleged, or that the defendants have violated the .

. . laws in ways that have not been alleged." Associated General

Contractors of California, Inc. v. California State Council of

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

III.

ANALYSIS

St. Paul contends that the District’s two fraud claims and

negligent misrepresentation claim should be dismissed because the

District has failed to allege facts which would allow it to prevail

on these claims. St. Paul also contends that the District has not

pled the three claims with the requisite specificity as set forth

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by Fed. R. Civ. P. 9(b). As I explain below, St. Paul’s motion to

dismiss the District’s counterclaims must be granted with leave to

amend.

A. THIRD COUNTERCLAIM: THE DISTRICT’S FRAUD CLAIM REGARDING THE

TAKEOVER AGREEMENT

The elements that give rise to a tort action for fraud and

deceit in California are (1) misrepresentation, (2) knowledge of

falsity or scienter, (3) intent to defraud, (4) justifiable

reliance and (5) resulting damage. City Solutions, Inc. v. Clear

Channels Communications, Inc., 365 F.3d 835, 839 (9th Cir. 2004)

(citation omitted). St. Paul argues that the District has failed

to allege three elements of fraud: misrepresentation; justifiable

reliance; and resulting damage. As explained below, St. Paul’s

motion to dismiss this cause of action must be granted because the

District fails to allege a misrepresentation of fact, a requisite

for suit.

The District alleges in its third counterclaim that:

. . . St. Paul represented that Natomas was required to

sign St. Paul’s Takeover Agreement before St. Paul could

or would proceed with the project as it was obligated to

do under Performance Bond No. SF6950. Natomas is

informed and believes and on those grounds alleges that

St. Paul’s representations were in fact false and that

no provisions of the contract or performance bond, or

law, required Natomas to execute a Takeover Agreement,

as a condition precedent to St. Paul performing its

obligations, or at all (emphasis supplied). 

Countercl. at ¶ 22.

The District also alleges that St. Paul made such

representations with the intent of fraudulently inducing Natomas

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3 The Ninth Circuit explains that the general rule is not

without exception because the Restatement lays out four special

situations that would justify reliance on such a misrepresentation

of law: Where the party making the misrepresentation (1) purports

to have special knowledge; (2) stands in a fiduciary or similar

relation of trust and confidence to the recipient; (3) has

successfully endeavored to secure the confidence of the recipient;

(4) or has some other special reason to expect that the recipient

will rely on his opinion. Miller, 358 F.3d at 621. The District

has failed to allege any of these circumstances.

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to rely on those representations to sign a Takeover Agreement, “in

an effort to remove many of Natomas’ rights to which it was

entitled under the underlying contract.” The District claims that

St. Paul made such representations knowing that they were false or

misleading, and that it acted in reliance on such representations

by attempting to negotiate a Takeover Agreement, which caused the

construction project to be delayed. Countercl. at ¶ 23. 

In sum, the District is alleging that St. Paul misrepresented

the law. The counterclaim explicitly states that “St. Paul's

representations were in fact false and that no provisions of the

contract or performance bond, or law, required Natomas to execute

a Takeover Agreement.” Countercl. at ¶ 21. 

The Ninth Circuit has explained that “fraud cannot be

predicated upon misrepresentations of law or misrepresentations as

to matters of law." Miller v. Yokohama Tire Co., 358 F.3d 616, 621

(9th Cir. 2004)(citing Am.Jur.2d of Fraud and Deceit § 97 (2001)).3

“[S]tatements of domestic law are normally regarded as expressions

of opinion which are generally not actionable in fraud even if they

are false.” Id. However, “if a misrepresentation as to matter of

law includes, expressly or by implication, a misrepresentation of

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fact, the recipient is justified in relying upon the

misrepresentation of fact to the same extent as though it were any

other misrepresentation of fact.” Restatement 2d., Torts § 545.

See Crandall v. Parks, 152 Cal. 772, 776 (1908).

The present complaint does not allege that St. Paul’s

representations included express or implied misrepresentations of

fact. Thus, the District’s fraud claim as to the takeover

agreement does not lie.

B. FOURTH COUNTERCLAIM: THE DISTRICT’S FRAUD CLAIM REGARDING THE

MOLD REMEDIATION PLAN

In its fourth counterclaim, the District alleges that St. Paul

falsely represented that the District “was required to agree to an

unreasonable mold remediation plan before St. Paul could or would

proceed with the project” with the intent of inducing the District

to agree to the allegedly unreasonable program. Countercl. at 

¶¶ 31, 32. 

The District further alleges that St. Paul knew that the above

representation was false, but that it ultimately agreed to the

unreasonable mold remediation plan. As with the third cause of

action, the District asserts that it incurred damages due to St.

Paul’s allegedly fraudulent inducement. In addition, it avers that

while the two parties were negotiating the terms of the remediation

agreement, the construction was unduly delayed and the mold caused

further damage to the District’s property. St. Paul contends that

the District fails to allege a misrepresentation, knowledge of

falsity, and justifiable reliance. 

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Again, the district’s counterclaim falls short. The District

merely incorporates its previous allegations and additionally

claims that St. Paul “represented that Natomas was required to

agree to an unreasonable mold remediation plan before St. Paul

could or would proceed with the project.” Countercl. at ¶ 31. The

fourth counterclaim fails to allege that there was a

misrepresentation fact. 

As explained above, because misrepresentation gives rise to

a fraud claim only if it is a misrepresentation of material fact,

as opposed to misrepresentation about the law applicable to facts

equally known to both parties, such an allegation is not

cognizable. See Miller, 358 F.3d at 621. Accordingly, the

District’s fourth counterclaim is dismissed. 

C. FIFTH COUNTERCLAIM: THE DISTRICT’S NEGLIGENT 

MISREPRESENTATION CLAIM

Under California law, the elements of negligent

misrepresentation are: (1) misrepresentation of a past or existing

material fact, (2) without reasonable ground for believing it to

be true, (3) with intent to induce another’s reliance on the

misrepresentation, (4) ignorance of the truth and justifiable

reliance by the party to whom it was directed, and (5) resulting

damages. Jackson v. Roe, 73 F.3d 1192, 1201 n.2 (9th Cir. 2001)

(citations omitted).

In the case at bar, the District alleges that St. Paul,

“represented that Natomas was required to comply with St. Paul’s

unreasonable and unjust demand, on two separate occasions

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[regarding the takeover agreement and the mold remediation plan]

before St. Paul could or would proceed with the project.”

Countercl. at ¶ 41. The District avers that St. Paul made the

representations with the intent to induce reliance on the

misrepresentations and that it was not aware of the falsity of the

representations and relied on them to its detriment. 

The only difference between negligent misrepresentation and

fraud is that for negligent misrepresentation, the party making the

misrepresentation need not know of its falsity but instead must

make the representation without reasonable grounds for believing

it to be true. See, e.g., B.L.M. v. Sabo & Deitsch, 55 Cal.App.4th

823 (1997). The District, however, must still allege facts showing

that St. Paul misrepresented some material fact. Because this

cause of action is premised on the same allegations in the third

and fourth counterclaim, it also fails under the common law because

misrepresentations as to legal opinion are not actionable.

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4 The District is granted fifteen (15) days from the date of

this order to amend their counterclaims. Counsel is admonished

that amendments not made in good faith shall result in sanctions

being issued pursuant to Fed. R. Civ. P. 11. 

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IV.

CONCLUSION

St. Paul’s motion to dismiss the District’s third, fourth, and

fifth counterclaims is GRANTED with leave to amend.4

IT IS SO ORDERED. 

DATED: July 26, 2005.

/s/Lawrence K. Karlton 

LAWRENCE K. KARLTON

SENIOR JUDGE

UNITED STATES DISTRICT COURT

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