CMR Mortgage Fund, LLC v. Canpartners Realty Holding Company IV LLC et al

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
CMR MORTGAGE FUND, LLC, a
California limited liability
company,
Debtor.
CMR MORTGAGE FUND, LLC, a
California limited liability
company,
Plaintiff,
vs.
CANPARTNERS REALTY HOLDING
COMPANY IV LLC, a Delaware
limited liability company; SCD
KUNIA, LLC, a Hawaii limited
liability company; and STANFORD
CARR, an individual, and DOES 1
through 20, inclusive,
Defendants.
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Case No. 08-32220 TEC
Chapter 11
Adv. Proc. No. 08-3148-TC
MEMORANDUM DECISION RE SCD KUNIA, LLC AND STANFORD CARR’S
MOTION TO DISMISS
Signed and Filed: May 08, 2009
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 08, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1 SDC is a Hawaii limited liability company. 	Compl., ¶ 8.
Stanford Carr is an individual who resides in Hawaii. 	Id., ¶ 9.
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For the following reasons, I grant SCD Kunia LLC and Stanford
Carr’s Motion to Dismiss in its entirety with leave to amend.
Hawaii law governs resolution of this dispute.
FACTS
This dispute arises out of a $97,000,000 loan made in 2007 to
Halekua Development Corporation (“HDC”) by Canpartners Realty
Holding Co. IV LLC (“Canyon”) and CMR Mortgage Fund, LLC (“CMR”) to
fund HDC’s acquisition and development of Hawaiian real property
(the Property). 	Compl., ¶ 12. 	As part of the loan transaction, the
co-lenders hired Stanford Carr (“Carr”) and his company, SCD Kunia,
LLC (“SCD”) 1 to provide management services for development of the
Property, including obtaining land use entitlements and state and
local government approvals related to the project. Id., ¶ 17. 	The
parties entered into the following contracts.
A. 	The Management Agreement
In March 2007, HDC and SCD entered into a Project Management
Agreement (“Management Agreement”). 	The Management Agreement
required SCD to work collaboratively with HDC “to advance the pre-
construction development process.” 	Mgmt. Agmt., § 1.8. 	Under the
Management Agreement, HDC appointed SCD as its attorney-in-fact for
the purpose of executing, delivering, and recording all instruments
and documents “deemed necessary or appropriate by Manager in order
to advance the Project. . . .” and other like tasks. 	Mgmt. Agmt.,
§ 1.11(n). 	The Management Agreement provides that SCD shall at no
time hold itself out as an agent for HDC, and shall have no
authority to bind HDC or the project to any obligation, except as
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expressly provided in the Management Agreement. 	Id., § 1.5. 	The
Management Agreement provides that SCD
shall have no authority . . . to. . . [e]xecute any
contract or incur any obligation on behalf of [HDC] or for
the benefit of the Project, other than those contracts
with governmental authorities necessary or appropriate for
the development of the Project and those contracts with
consultants and others providing products or services . .
. contemplated by the applicable Budget. . . .
Id., § 1.15(c). 	The Management Agreement provides that there shall
be no third-party beneficiaries of the Agreement, “or otherwise give
rise to any cause of action in any person not a party hereto.” 	Id.,
§ 6.10. 	The Management Agreement contains a Hawaii choice-of-law
clause, and provides that claims arising out of the Agreement shall
be resolved by arbitration. 	Id., §§ 6.8, 6.13. 	Schedule A to the
Management Agreement specifies the milestones SCD is responsible for
achieving. 	Schedule B specifies 41 pre-construction development
tasks for which SCD is responsible.
B. 	Option Agreement
On March 9, 2007, Carr and SCD entered into an Option Agreement
with HDC. 	The Option Agreement grants SCD “exclusive and
irrevocable options” to purchase a portion of the residential super-
pads (“Super-Pads”) created by HDC on the Property for further
development into residential units. 	§ 1. 	SCD was granted options
to purchase 25 percent of the Super-Pads “for a price equal to the
then current ‘market rate’ for such Super-Pad at the time of the
exercise of such options” and 25 percent of the Super-Pads at a
“price equal to ninety percent of the then-current ‘market rate’ for
each Super-Pad at the time of the exercise of such options.” 	Id.
The Option Agreement contains a Hawaii choice-of-law clause, and a
mandatory arbitration provision. 	Id., §§ 18, 23.
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C. 	Assignment and Subordination of Project Management Agreement
On March 12, 2007, HDC, SCD, Canyon, and CMR entered into an
Assignment and Subordination of Project Management Agreement
(“Assignment”), pursuant to which HDC assigned the Management
Agreement to Canyon and CMR as additional security for the Loan.
Assignment Agmt., § 1. 	In the Assignment, SCD agreed to perform all
of its obligations under the Management Agreement. 	Id. 	The
Assignment Agreement provides as follows.
Neither this Agreement nor any action or actions on
the part of Lender shall constitute an assumption by
Lender of any of Borrower’s obligations under the Project
Management Agreement unless and until Lender shall have
given written notice to Manager of its election to
exercise the rights of Borrower under the Project
Management Agreement following an Event of Default.
Thereafter, Lender shall have the rights, obligations,
privileges and rights of election as provided in the
Project Management Agreement. 	Prior to such notice,
(i) Borrower shall continue to be liable for all of its
obligations under the Project Management Agreement and . .
. 	(ii) Manager shall continue to fulfill its obligations
to Borrower under the terms of the Project Management
Agreement.
Id. (emphasis added).
The Assignment Agreement further provides that “from and after”
Lender’s succession to the interests of HDC under the Project
Management Agreement, Lender “shall have the same remedies against
Manager for the breach of any provision contained in the Project
Management Agreement. . . .” 	Id., § 9. 	As long as HDC is not in
default under the Loan Documents or the Project Management
Agreement, HDC “shall be entitled to all of its rights under the
Project Management Agreement, except to the degree such rights
conflict with [HDC]’s obligations pursuant to the Loan Documents or
this Agreement.” 	Id., § 11.
The Assignment Agreement provides that it is
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28 	2 The Assignment Agreement provides that capitalized terms not
defined therein shall have the meaning assigned to such terms in
the Credit Agreement. Preamble, p. 1.
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for security purposes only. 	Accordingly, Lender shall
have no right under this Agreement to enforce the
provisions of the Project Management Agreement until
Borrower shall be in default under its obligations to
Lender under this Agreement or any of the other Loan
Documents or until Manager fails to perform its
obligations under this Agreement or the Project Management
Agreement. . . . 	Upon the occurrence of any Event of
Default, Lender may . . . exercise its rights under this
Agreement or the Management Agreement as Borrower’s
attorney-in-fact. . . and in addition Lender shall have .
. . any and all rights and remedies of a secured party. .
. .
Id., § 15. 	With respect to the Management Agreement, Event of
Default is defined as a default that continues more than ten days
after written notice thereof from the Project Manager. 	Credit
Agmt., § 12.1.10. 2
The Assignment Agreement is governed by Hawaii law, and
contains a waiver by each party thereto of the right to jury trial.
§§ 23, 28.
D. 	The Complaint
On November 30, 2009, CMR filed the complaint initiating this
action. 	CMR asserts a breach of contract claim solely against SCD.
In addition, CMR asserts two causes of action against both
Defendants for breach of fiduciary duty and aiding and abetting
Canyon’s alleged breach of fiduciary duty.
On January 5, 2009, SCD and Carr filed their Motion to Dismiss
the complaint for failure to state any claims upon which relief can
be granted.
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LAW
A. 	Standard of Review
A court should dismiss a complaint if it does not set forth
specific factual allegations permitting a plausible conclusion that
the plaintiff would be entitled to relief if allowed to proceed
beyond the motion to dismiss. 	Bell Atlantic v. Twombly, 127 S.Ct.
1955, 1965 (2007). 	Allegations based upon mere possibility,
suspicion, or speculation are insufficient. 	Rather, the plaintiff
must plead specific facts providing a plausible basis to conclude
that the essential elements of the asserted claim are met. 	Id.
In ruling upon a motion to dismiss, the court may consider the
contents of documents referred to the complaint and central to the
complaint, if the authenticity of the documents is not contested.
Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th Cir. 1998); Branch
v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) (overruled on other
grounds in Galbraith v. County of Santa Clara, 307 F.3d 1119, 1127
(9th Cir. 2002)). 	The court may consider such documents without
converting the motion to dismiss into a motion for summary judgment.
Knievel v. ESPN, 393 F.3d 1068, 1076-66 (9th Cir. 2005). 	Any
ambiguity in the documents, however, must be resolved in the
plaintiff’s favor. 	Int’l Audiotext Network, Inc. v. AT&T Co., 62
F.3d 69, 72 (2d Cir. 1995); Hearn v. R.J. Reynolds Tobacoo Co., 279
F.Supp. 2d 1096, 1102 (D. Ariz. 2003).
If a court dismisses a complaint, a party may amend its
complaint with the court’s leave, and leave shall be freely given
where “justice so requires”. 	Leave to amend will not be granted if
amendment would be futile. 	Theme Promotions, Inc. v. News Am.
Mkting. FSI, 546 F.3d 991, 1010 (9th Cir. 2008).
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B. 	Analysis of Claims for Relief
1. 	Tenth Claim for Relief: Breach of Contract (SCD only)
Under the Management Agreement, SCD was required, inter alia,
to work collaboratively with HDC to “advance the pre-construction
development process” and “to perform its services with care, skill,
and diligence,” in accordance with the applicable professional
standards currently recognized by persons in the State of Hawaii
performing the same or similar service. 	Compl., ¶ 74; Mgmt. Agmt.,
§§ 1.8, 4.1(d). 	CMR alleges that SCD breached the Management
Agreement and the Assignment Agreement by engaging in conduct that
chilled the market for potential investors in the project, by
telling potential investors that the Super-Pads would have a fair
market value that was less than the cost to build out the remaining
infrastructure and pay off the existing debt. 	Compl., ¶ 75. 	CMR
alleges that SCD’s estimates of value for the cost were
intentionally, knowingly, and falsely substantially lower than the
true values as a means of chilling any investors from working with
CMR to protect the value of its note. 	Id. 	CMR alleges that SCD’s
conduct caused potential investors, such as DIVCO West, which had
been willing to invest $40,000,000 in the project, to refuse to
invest in the project or buy the property, thus depriving CMR of a
means of obtaining funds to pay off the Loan. 	Id.
CMR has not alleged facts that would entitle it to assert a
breach of contract claim against SCD. 	CMR is neither a signatory to
the Management Agreement nor a third-party beneficiary thereof. 	The
Management Agreement provides that there shall be no third-party
beneficiaries of the Agreement, “or otherwise give rise to any cause
of action in any person not a party hereto.” Mgmt. Agmt.,§ 6.10.
Although the Assignment Agreement provides for a present assignment
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of HDC’s rights under the Management Agreement, it also provides
that CMR is only entitled to assert those rights after CMR gives
written notice to SCD of its election to assert SCD’s rights in the
Management Agreement following an event of default. 	Assignment
Agmt., § 1; accord id., § 9 (CMR entitled to assert HDC’s rights
under the Assignment Agreement after CMR or Canyon’s succession to
HDC’s interest therein). 	The complaint does not allege that CMR or
Canyon gave written notice to SCD of Lender’s election to exercise
HDC’s rights under the Management Agreement or that an Event of
Default continue more than ten days after written notice from SCD.
Accordingly, the complaint fails to state a claim for breach of
contract upon which relief may be granted.
2. 	Eleventh Claim for Relief: Breach of Fiduciary Duty
CMR alleges that, as an agent of HDC, SCD and Carr owed a
fiduciary duty not only to HDC, but also to CMR by virtue of CMR’s
interest in the Management Agreement. 	Compl., ¶ 78. 	CMR alleges
that SCD breached its fiduciary duty by engaging in conduct that
chilled the market for potential investors in the Project and
deprived the Project of funds for development by telling potential
investors that the Super-Pads would have a fair market value that
was less than the cost to build out the remaining infrastructure and
pay off the existing debt. 	Id. 	The complaint alleges that “Carr’s
estimates of value for the lots were intentionally, knowingly and
falsely substantially lower than the true values as a means of
chilling any investors from working with . . . Plaintiff to project
the value of its note.” 	Id. 	CMR also alleges that both SCD and
Carr had a conflict of interest arising out of the Option on the
Super-Pads, because it was in their interest to dissuade potential
investors and preserve their option on 50 percent of the Super-Pads.
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Id., ¶ 79. 	CMR alleges that SCD and Carr “engaged in conduct” that
was designed to promote their own financial interests to the
detriment of CMR’s rights and interests. 	Id.
CMR fails to state a claim for breach of fiduciary duty upon
which relief can be granted.
First, neither SCD nor Stanford Carr is an agent for CMR.
Although SCD is an attorney in fact for HDC under the Management
Agreement, CMR is not a party to that Agreement nor in privity with
HDC. 	CMR cannot state a claim as a third-party beneficiary, because
the Agreement specifically provides that none of its provisions
shall inure to the benefit of third parties. 	Mgmt. Agmt., § 6.10;
accord Pancakes of Hawaii, Inc. v. Pomare Props. Corp., 944 P.2d 97,
106 (Haw. Ct. App. 1997) (contract must have been intended to
benefit the third party, who must be something more than an
incidental beneficiary). 	The complaint does not allege that CMR or
Canyon gave written notice to SCD of Lender’s election to exercise
HDC’s rights under the Management Agreement, such that CMR can
assert HDC’s rights.
Second, the complaint bases the claim for breach of fiduciary
duty on the fact that SCD was HDC’s agent. 	Opp. to Motion to
Dismiss at 10. 	The Management Agreement granted SCD limited agency
powers to engage in specific tasks necessary to advance the pre-
construction development process. 	It did not grant SCD any power to
bind HDC for purposes other than those expressly permitted by the
Management Agreement. 	Mgmt. Agmt., §§ 1.5; 1.11(n), 1.15(c). 	Thus,
even if CMR could assert HDC’s rights under the Management
Agreement, the alleged statements fall outside the scope of SCD’s
agency. 	Rstmt. (Third) of Agency § 3.01 (actual authority is
created by the principal’s assent that the agent take the action on
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the principal’s behalf). 	Because the basis of the claim for breach
of fiduciary duty is SCD’s asserted status as an agent for HDC, the
complaint fails to state a claim upon which relief may be granted.
Third, CMR has not alleged a claim for breach of fiduciary duty
based on SCD and Carr’s alleged conflict of interest created by the
Option Agreement. 	An agent may have a financial interest in the
subject of the representation as long as the principal consents
thereto after disclosure of material facts, and the agent acts in
good faith. 	Rstmt. (Third) of Agency § 8.06. 	Here, CMR consented
to the Option Agreement. 	The Management Agreement expressly
provides that SCD’s compensation includes “options to acquire
development pads” as set forth in the “Option Agreement attached
hereto as Exhibit A, which shall be executed concurrently herewith.”
Mgmt. Agmt. § 2.3. 	The Management Agreement further provides that
the Option Agreement is “an essential inducement” for SCD to enter
into the Management Agreement. 	Id. 	HDC and SCD assigned the
Management Agreement to CMR, and CMR accepted the assignment as
additional security for the Loan. 	Assignment Agmt., § 1(a). 	The
complaint does not allege that SCD did not act in good faith in
obtaining CMR’s consent to the Option Agreement, or that SCD did not
disclose material facts known at the time by SCD. 	Accordingly, CMR
has failed to state a claim for breach of fiduciary duty based on
the alleged conflict of interest created by the Option Agreement.
3. 	Claims Based on Intentionally False Statements
The complaint alleges that SCD and Stanford Carr made
intentionally false statements regarding the estimated future value
of the Property, and that such statements were made with the purpose
of chilling any investors “from working with [CMR] to protect the
value of its note.” 	Compl. ¶ 78. 	False representations are a type
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of fraud. 	TSA Intern. Ltd. v. Shimizu Corp., 990 P.2d 713, 725
(1999). 	Accordingly, any claim based on these statements is subject
to the heightened pleading standard of FRCP 9(b). 	Vess v. Ciba-
Geigy Corp. USA, 317 F.3d 1097, 1103-06 (9th Cir. 2003). 	To satisfy
this heightened standard, the complaint must allege the “who, what,
when, where, and how” of the misconduct charged, and why the value
estimates were misleading. 	Id. at 1106. 	The complaint fails to
identify when and where the alleged statements were made, whether
they were made orally or in writing, and why the value estimates
were misleading. 	Furthermore, to the extent the statements related
solely to future facts, and not to past or existing facts, they are
not actionable under Hawaii law as false representations. 	TSA
Intern. at id. 	(“fraud cannot be predicated on . . .unfulfilled
predictions or expectations, or erroneous conjectures as to future
events.”). 	Because the breach of fiduciary duty claim does not
satisfy the heightened pleading standard of fraud, and because it
fails to allege misrepresentations of past or existing fact, the
complaint fails to state a misrepresentation claim upon which relief
may be granted. 	Vess, 317 F.3d at 1107 (“A motion to dismiss a . .
. claim ‘grounded in fraud’ under Rule 9(b) for failure to plead
with particularity is the functional equivalent of a motion to
dismiss under Rule 12(b)(6) for failure to state a claim.”); TSA
Intern., 990 P.2d at 725.
4. 	Twelfth Claim for Relief: Aiding and Abetting Breach of
Fiduciary Duty
CMR alleges that SCD and Carr sought to aid and assist Canyon
in its attempts to seize control over the Property and to eliminate
CMR’s interest in the Loan. 	Complaint, ¶ 83. 	Because the court has
determined that CMR failed to state a claim against Canyon for
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breach of fiduciary duty, CMR’s claim for aiding and abetting
Canyon’s breach of fiduciary necessarily fails to state a claim upon
which relief can be granted. 	Richard B. LeVine, Inc. v. Higashi,
131 Cal. App. 4th 566, 574-75 (2005).
**END OF MEMORANDUM DECISION**
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Court Service List
Michael D. Cooper, Esq.
Wendel, Rosen, Black and Dean
1111 Broadway, 24th Floor
P.O. Box 2047
Oakland, CA 94604-2047
Richard J. Grad, Esq.
Jeremy Rosenthal, Esq.
Sidley, Austin, Brown and Wood
555 W 5th St.
Los Angeles, CA 90013-1010
Ryan Sandrock, Esq.
Robert B. Martin III, Esq.
Sidley Austin LLP
555 California St. #2000
San Francisco, CA 94104
Douglas R. Young, Esq.
Richard Van Duzer, Esq.
Rachael Turner, Esq.
Tyler Gerking, Esq.
Farella, Braun and Martel
235 Montgomery St.
San Francisco, CA 94104
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