Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-05399/USCOURTS-cand-3_06-cv-05399-0/pdf.json

Parties Involved:
Russell H. Frye
Plaintiff
Carl Gelsman
Defendant
Edward Gelsman
Defendant
The Wine Library, Inc
Defendant

Document Text:

United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

RUSSELL H. FRYE, an individual,

Plaintiff,

 v.

THE WINE LIBRARY, INC., a

California corporation, EDWARD

GELSMAN, an individual, and CARL

GELSMAN, an individual,

Defendants.

 

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No. 06-5399 SC

ORDER DENYING

DEFENDANTS' PARTIAL

MOTION TO DISMISS

I. INTRODUCTION

Plaintiff Russell H. Frye ("Plaintiff") brought this action

alleging seven causes of action under California law, arising out

of the sale of allegedly counterfeit wines to Plaintiff by

Defendants The Wine Library et al. ("Defendants"). See Complaint. 

Defendants now move the Court to dismiss the first five of those

causes of action. See Defendants' Partial Motion to Dismiss for

Failure to State a Claim on which Relief Can Be Granted ("Motion

to Dismiss"). For the reasons stated herein, the Court hereby

DENIES Defendants' Motion to Dismiss. 

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II. BACKGROUND

This action arises out of a series of deals which occurred

from June, 2000 to February, 2003 between Plaintiff and Defendants

involving fine wines with prices ranging as high as $42,000.00 per

bottle, with an aggregate price of approximately $565,000.00

(together the "Wines"). Complaint at 1, 3. Plaintiff is "an avid

collector of fine wines." Id. at 1. Defendants are vendors of

fine wines who act, at least in some sense, like brokers, bringing

together buyers and sellers of fine wines. See id. at 4. The

Complaint alleges that Defendants sold Plaintiff a number of very

expensive bottles of wine after representing to Plaintiff that the

bottles contained very rare, fine wines and knowing that Plaintiff

would likely try to resell the wines at auction. See id. at 2-3. 

Plaintiff alleges that he relied on these representations in

making his decisions to buy the Wines. Id. at 2. 

In December, 2005, Plaintiff began preparations to sell some

or all of the Wines at auction. Id. at 13. In preparation, a

representative of the auctioneer inspected the wines which

Plaintiff intended to offer at auction. Id. Following the

inspection, the representative informed Plaintiff that there were

"significant indications" that "the vast majority of the pre-1962

wines Mr. Frye had purchased from the Wine Library . . . were

counterfeit," and so would not be offered at auction. Id.

According to Plaintiff, this was the first time he had any

knowledge of any such questions of authenticity. Id. Plaintiff

then had "a recognized expert in fine and rare wines" examine the

Wines, and the expert concluded that "34 were counterfeit, and an

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additional 12 bottles were suspect." Id. Thus, according to the

expert's analysis, "almost 90% of the pre-1962 wines sold to

plaintiff by the Wine Library were either counterfeit or

sufficiently suspect that they could not be resold in the wine

auction marketplace." Id.

On August 31, 2006 Plaintiff filed the instant action. See

id. The Complaint states seven causes of action: 1) fraud under

Cal. Civ. Code § 1709; 2) constructive fraud under Cal. Civ. Code

§ 1573; 3) common law negligent misrepresentation; 4) unlawful

business practice under Cal. Bus. and Prof. Code § 17200; 5)

fraudulent business practice under Cal. Bus. and Prof. Code §

17200 6) breach of contract; and 7) breach of implied warranty. 

See id. The first three counts are made against all Defendants,

the last four counts are made only against the The Wine Library,

Inc. See id. Defendants now move the Court under Federal Rule of

Civil Procedure ("FRCP") 12(b)(6) to dismiss Plaintiff's first

five causes of action for failure to state a claim on which relief

can be granted. See Motion to Dismiss.

III. LEGAL STANDARD

A Rule 12(b)(6) motion to dismiss tests the sufficiency of

the complaint. Dismissal pursuant to Rule 12(b)(6) is appropriate

only where it "appears beyond doubt that the plaintiff can prove

no set of facts in support of his claim which would entitle him to

relief." Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1482 (9th

Cir. 1991), quoting Conley v. Gibson, 355 U.S. 41, 45–46 (1957). 

In reviewing the motion, a court must assume all factual

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allegations made by the nonmoving party to be true and construe

them in the light most favorable to the nonmoving party. North

Star Intern. v. Arizona Corp. Comm'n, 720 F.2d 578, 590 (9th Cir.

1993). Nevertheless, a complaint must be based on more than

"[c]onclusory allegations of law and unwarranted inferences" in

order to defeat a motion for dismissal. Parino v. FHP, Inc., 146

F.3d 699, 706 (9th Cir. 1999), quoting In re VeriFone Sec. Litig.,

11 F.3d 865, 868 (9th Cir. 1993).

IV. DISCUSSION

A. Economic Loss Rule (Claims 1-3)

Defendants move the Court to dismiss the first three causes

of action (which Defendants refer to as the "tort causes of

action") on the grounds that they are barred by the "economic loss

rule." Motion to Dismiss at 3. "The economic loss rule requires

purchaser to recover in contract for purely economic loss due to

disappointed expectations, unless he can demonstrate harm above

and beyond a broken contractual promise." Robinson Helicopter

Company, Inc. v. Dana Corp., 34 Cal.4th 979,988 (2004). Such

harm, in general, may be demonstrated by showing injury arising

from a breach of duty which is independent of the contract or from

conduct done with the intention of causing harm. Erlich v.

Menezes, 21 Cal.4th 543, 552 (1999). As Defendant concedes,

fraudulent inducement of a contract fits within this exception,

see Reply at 4 (citing Elrich, 21 Cal.4th at 552, and at least one

California appeals court has held that fraud in the performance of

a contract qualifies as well. See id. (quoting Harris v. Atlantic

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Richfield Co., 14 Cal.App.4th 70, 78 (Cal. Ct. App. 1993), but

characterizing its holding as dicta). 

We need not resolve at this time whether fraud or other types

of tortious deceit related to the performance of a contract

qualifies as an exception to the economic loss rule. The

Complaint sufficiently alleges facts on which could be based a

claim for fraud or other types of tortious deceit with regards to

the inducement of the contracts in question. 

Section 1709 reads: "Fraudulent Deceit. One who willfully

deceives another with intent to induce him to alter his position

to his injury or risk, is liable for any damage which he thereby

suffers." Cal. Civ. Code § 1709. The Complaint alleges that:

Defendants made statements regarding the vintage and producer of

the Wines that were not warranted by the information known to

Defendants at the time; these statements were made with the intent

to induce Plaintiff to purchase the Wines; Plaintiff relied on

these representations, and suffered injury as a result. Complaint

at 14-15. These allegations state a claim for fraudulent

inducement under Section 1709, see Hayward Union High School

District v. Madrid, 234 Cal.App.2d 100, 110, 121 (Cal. Ct. App.

1965), and thus are not defeated by the economic loss rule. 

Constructive fraud (Plaintiff's second claim) under Section

1573 consists:

1. In any breach of duty which, without an actually

fraudulent intent, gains an advantage to the person in

fault, or any one claiming under him, by misleading

another to his prejudice, or to the prejudice of any one

claiming under him; or,

2. In any such act or omission as the law specially

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declares to be fraudulent, without respect to actual

fraud.

Cal. Civ. Code § 1573. Plaintiff alleges a confidential

relationship between Plaintiff and Defendants which created a duty

breached in the manner described above in relation to Plaintiff's

fraud allegations. Complaint at 15-16. Similar to his actual

fraud claim, Plaintiff's constructive claim can be characterized

as one regarding wrongful acts of Defendants in the inducement of

the contract. It, therefore, states a claim for a "violation of a

duty independent of the contract arising from principles of tort

law," and so is not barred by the economic loss rule. Robinson

Helicopter, 34 Cal.4th at 989. 

Plaintiff has also alleged all the elements necessary to

state a claim for common law fraudulent misrepresentation. See

Complaint at 17-18; Continental Airlines, Inc. v. McDonnel Douglas

Corp., 216 Cal.App.3d 388, 402 (Cal. App. Ct. 1989) (listing the

six elements of negligent misrepresentation). As Plaintiff's

negligent misrepresentation claim can be characterized as relating

to Defendant's inducement of Plaintiff to contract, there is also

no question of it being barred by the economic loss rule. 

Robinson Helicopter, 34 Cal.4th at 989.

B. No Fiduciary Relationship (Claim 3)

Defendants also argue that Plaintiff's constructive fraud

claim should be dismissed because no fiduciary duty existed

between the Defendants and Plaintiff, as is required to make such

a claim. See Motion to Dismiss at 8-9. Defendants argue that

"[i]t is essential to the operation of the doctrine of

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constructive fraud that there exist a fiduciary or special

relationship," and that Plaintiff cannot prove a fiduciary

relation between Defendants and himself because their relationship

was simply a commercial one between sellers and a buyer. Id. at 8

(quoting Peterson Development Co. v. Torrey Pines Bank, 233

Cal.App.3d 103,16 (Cal. App. Ct. 1991). Plaintiff, on the other

hand, argues that "a violation of a confidential relationship

constitutes constructive fraud," and that a confidential

relationship arose between Defendants and Plaintiff as a result of

certain characteristics of the deal between them. Opposition at 5

(quoting Day v. Greene, 59 Cal.2d 404, 411 (1963). 

The Court need not resolve at this point what type of

relationship Plaintiff must prove to prevail on his constructive

fraud claim: fiduciary, confidential, or some other type of

relationship that qualifies as special. Regardless of which

standard is used, at this stage in the litigation, the court does

not have sufficient information before it to determine whether the

relationship between Defendants and Plaintiff qualifies, or fails

to qualify, as any of these three types.

C. Statute of Limitations (Claims 4-5)

Defendants finally argue that Plaintiff's fourth and fifth

claims, which are brought under Cal. Bus. & Prof. Code § 17200,

should be dismissed as to 29 of the 34 bottles of Wine on the

grounds that such claims are barred by the applicable statute of

limitations. Motion to Dismiss at 9. The applicable statute of

limitations is "four years after the cause of action accrued." 

Cal. Bus. & Prof. Code § 17208. Defendants argue, and Plaintiff

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appears to concede, that the discovery rule does not apply to

Section 17200 claims. See Motion to Dismiss at 9; Opposition at

6. However, Plaintiff raises two fact-based exceptions to this: 

that equitable tolling should apply and that the various sales and

purchases of the Wines should be viewed as a single on-going

transaction. See Id. at 6-7. As Defendants' Reply brief

effectively concedes, arguing the facts as opposed to the law,

resolution of Plaintiff's arguments for application of these

exceptions demands a fact-based inquiry inappropriate at this

stage of the litigation. 

 

V. CONCLUSION

In light of the foregoing, Defendants' Partial Motion to

Dismiss for Failure to State a Claim upon which Relief can be

Granted is DENIED. 

IT IS SO ORDERED.

December 04, 2006 ____________________________

UNITED STATES DISTRICT JUDGE

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