Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_09-cv-02451/USCOURTS-caed-2_09-cv-02451-0/pdf.json

Parties Involved:
Hartford Fire Insurance Company
Plaintiff
Westamerica Bank
Defendant

Document Text:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

IN THE UNITED STATES DISTRICT COURT 

FOR THE EASTERN DISTRICT OF CALIFORNIA 

HARTFORD FIRE INSURANCE 

COMPANY, a Connecticut 

corporation, 

 Plaintiff, 

 v. 

WESTAMERICA BANK, a California 

corporation, 

 Defendant. 

______________________________/

 

Case No. 09-CV-02451-JAM-DAD 

ORDER DENYING DEFENDANT’S 

MOTION TO DISMISS 

This matter comes before the Court on Defendant Westamerica 

Bank’s (“Defendant’s”) Motion to Dismiss Plaintiff Harford Fire 

Insurance Company’s (“Plaintiff’s) complaint. Defendant seeks 

dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6) 

for failure to state a claim upon which relief may be granted. 

1 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 1 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

 

Plaintiff opposes the motion. For the reasons set forth below, 

Defendant’s motion is DENIED. 1 

I. FACTUAL AND PROCEDURAL BACKGROUND 

On November 2, 2005, Pacific Mountain Partners at Gridley, LLC 

(“PMPG”) entered into a Subdivision Improvement Agreement 

(“SIA”) with the City of Gridley, to construct certain public 

improvements in connection with development of a subdivision in 

Gridley, California. In order to finance the project, PMPG 

obtained a construction loan from Defendant. As a condition of 

the SIA, PMPG was required to furnish a surety performance bond 

and a payment bond to guarantee the completion of the 

improvements and payment to subcontractors and suppliers. 

In September 2005, Defendant sent a letter to Plaintiff. This 

letter confirmed that a construction loan had been made to PMPG, 

informed Plaintiff of a set aside commitment of funds in the 

amount of $1,243,928.00, and outlined Defendant’s obligations 

regarding disbursal of funds to PMPG. The letter stated that 

payments would be disbursed to PMPG on PMPG’s order, in 

accordance with the schedule of payments set forth in the 

construction loan. The letter contained a clause stating that 

Defendant was entitled to make payments and disbursements in 

1

 This motion was determined to be suitable for decision without 

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

2 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 2 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

reliance on work-completion certificates from contractors, and 

would not be responsible to PMPG or Plaintiff for proper use of 

funds disbursed. It also stated that Defendant had no obligation 

to determine or insure that improvements were properly completed 

or that the earmarked amount was sufficient to complete the 

improvements. In the event that PMPG failed to complete the work 

covered by Plaintiff’s bonds, Plaintiff would receive set aside 

funds, if any remained, to cover the costs of completion. This 

letter was signed by Defendant, Plaintiff, and PMPG on September 

20, 2005. 

Attached to the letter was a site-work cost breakdown, which 

showed the work projects, original budget, total draws through 

August 17, 2005, amounts disbursed through August 29, 2005, and 

the amount of remaining funds. Pursuant to the breakdown, a 

total of $830,527.22 of the set aside funds had already been 

disbursed, leaving $571,060.78 remaining in set aside funds. 

Additionally, the breakdown showed a total of $275,061.54 in 

expenses that would be paid by PMPG. After signing the letter of 

agreement, Plaintiff issued the surety and payment bonds to 

PMPG, in reliance on the set aside agreement. 

In April 2006, PMPG requested funds (a “draw”), to do work on 

a well. Defendant disbursed the entire sum of money remaining in 

the set aside funds, approximately $571,060.78. According to the 

site-work cost breakdown, $340,000 was earmarked for “Municipal 

3 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 3 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Water Well Building, Pumps, Electrical & Piping.” However, after 

receiving the disbursal of funds, PMPG neither started nor 

finished the well work and instead defaulted. Plaintiff, 

pursuant to the surety bond, paid for the completion of the well 

work, which cost $619,912. When Plaintiff informed Defendant of 

the default and requested reimbursement of the $340,000 that was 

earmarked in the set aside fund for the well work, Defendant 

refused to reimburse on the grounds that no set aside funds 

remained. Plaintiff now sues for recovery of $340,000 under the 

theories of breach of contract and conversion. 

 

II. OPINION 

A. Legal Standard

A party may move to dismiss an action for failure to state a 

claim upon which relief may be granted pursuant to Federal Rule 

of Civil Procedure 12(b)(6). In considering a motion to dismiss, 

the court must accept the allegations in the complaint as true 

and draw all reasonable inferences in favor of the plaintiff. 

Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other 

grounds by Davis v. Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 

405 U.S. 319, 322 (1972). Assertions that are mere “legal 

conclusions,” however, are not entitled to the assumption of 

truth. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009), citing 

Bell Atl. Corp v. Twombly, 550 U.S. 544, 555 (2007). 

4 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 4 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

To survive a motion to dismiss, a plaintiff needs to plead 

“enough facts to state a claim to relief that is plausible on 

its face.” Twombly, 550 U.S. at 570. Dismissal is appropriate 

where the plaintiff fails to state a claim supportable by a 

cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 

901 F. 2d 696, 699 (9th Cir. 1990). 

Generally, the Court may not consider material beyond the 

pleadings in ruling on a motion to dismiss for failure to state 

a claim. There are two exceptions to this rule: when material is 

attached to the complaint or relied on by the complaint, or when 

the court takes judicial notice of matters of public record, 

provided the facts are not subject to reasonable dispute. 

Sherman v. Stryker Corporation, 2009 WL 2241664 at *2 (C.D. Cal. 

Mar. 30, 2009) (internal citations omitted). In the present 

case, the Court has considered the document attached to 

Plaintiff’s complaint. The document is a copy of the letter of 

agreement between Plaintiff and Defendant, whose authenticity is 

not disputed. 

B. Breach of Contract, First Cause of Action 

Plaintiff argues that the letter from Defendant regarding 

the set aside fund constituted a binding contract, which it 

relied upon in making the surety bond. Accordingly, Plaintiff 

argues that Defendant committed to disburse the funds to PMPG 

5 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 5 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

only for work completed, and to maintain set aside funds to 

reimburse Plaintiff in the event of a default by PMPG. Plaintiff 

further contends that because Defendant wrongfully disbursed 

funds to PMPG without requiring proof of work completion, it 

breached its contract with Plaintiff. In response, Defendant 

argues that the letter does not constitute a binding contract 

with Plaintiff, and even if it did, Defendant has not breached 

the terms. 

Formation of a contract requires parties capable of 

contracting, their consent, a lawful object, and sufficient 

cause or consideration. California Civil Code §1550. A set aside 

agreement letter between a surety and a lender may constitute an 

enforceable contract, so long as it has mutuality and 

consideration. City of Los Angeles v. Anchor Casualty Company, 

204 Cal. App. 2d 175 (1962). 

Defendant contends that the letter is not a contract 

because there was no consideration. Defendant had already made 

the loan to PMPG and disbursed the majority of the set aside 

funds, thus the letter merely constituted a memorandum 

summarizing for Plaintiff the terms of the construction and 

financing agreements already in place with PMPG. 

Plaintiff argues that consideration exists because the City 

of Gridley required PMPG to provide proof of a surety. Thus, 

without Plaintiff’s bond, PMPG could not have obtained the 

6 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 6 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

construction contract and would not have needed Defendant’s 

loan. Under California law, “any benefit conferred, or agreed to 

be conferred,” upon the promisor constitutes consideration. 

California Civil Code §1605. Accordingly, Plaintiff argues that 

consideration exists because all parties benefited from the 

surety bond and the letter was written to induce Plaintiff to 

issue a bond in reliance on the set aside agreement. 

Thus, inferring that an enforceable contract existed, 

Plaintiff has further raised plausible allegations that the 

terms of the contract were breached by Defendant’s disbursal of 

set aside funds. Treating the allegations of the complaint as 

true and interpreting them in the light most favorable to 

Plaintiff, as the Court is required to do, the Court finds that 

Plaintiff has sufficiently plead the facts necessary for a cause 

of action for breach of contract. Accordingly, Defendant’s 

motion to dismiss the breach of contract claim is DENIED. 

Plaintiff’s Opposition also raises a new cause of action 

for fraudulent inducement, alleging that if Defendant did not 

intend the set aside letter as a binding contract, then 

Defendant is guilty of fraudulent inducement for inducing 

Plaintiff to rely on the letter. The Court will not consider 

these new allegations as they were not raised in the FAC. “The 

focus of any Rule 12(b)(6) dismissal . . .is the complaint. This 

precludes the consideration of new allegations that may be 

7 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 7 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

raised in plaintiff’s opposition to a motion to dismiss brought 

pursuant to Rule 12(b)(6).” Cordell v. Tilton, 515 F. Supp. 2d 

1114, 1128 (S.D. Cal. 2007)(internal citations omitted). 

C. Conversion, Second Cause of Action 

 Plaintiff alleges that Defendant is guilty of conversion 

because it disbursed funds to PMPG that Plaintiff was entitled 

to in the event of a default by PMPG. Defendant contends that 

plaintiff’s conversion claim fails because it did not wrongfully 

disburse set aside funds, and Plaintiff was only entitled to set 

aside funds if any remained after a default. 

 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. Spates v. Dameron Hospital 

Ass’n., 114 Cal. App. 4th 208, 221 (2003). A generalized claim 

for money is not actionable as conversion. Gulf Insurance 

Company v. First Bank, 2008 WL 2383927 at *2 (E.D. Cal. June 4, 

2008). 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. Id. Funds identified in a set aside 

letter may constitute a specific and identifiable sum. Even 

where the ownership interest in the property is conditioned on 

8 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 8 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

default, once the condition has been met this is a sufficient 

possessory interest to support a cause of action for conversion. 

Id. at *3. 

 In the present case, Plaintiff’s entitlement to the funds 

that were allegedly converted was contingent on PMPG’s default. 

Plaintiff has alleged that the condition was met, thus 

triggering entitlement to funds that were wrongfully converted 

by Defendant. Plaintiff has sufficiently alleged an interest in 

the specific funds distributed to PMPG to survive the motion to 

dismiss. Accordingly, Defendant’s motion to dismiss the claim 

for conversion is DENIED. 

III. ORDER 

 For the reasons set forth above, Defendant’s motion to 

dismiss is hereby DENIED. 

IT IS SO ORDERED. 

Dated: January 22, 2010 

9 

Case 2:09-cv-02451-JAM -DAD Document 14 Filed 01/25/10 Page 9 of 9