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

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MEMO RE SCD AND CARR’S
MOTION TO DISMISS AM. COMPL.
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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 AMENDED COMPLAINT
On November 30, 2008, CMR filed the complaint initiating this
action against project manager SCD Kunia, LLC (“SCD”) and SCD’s
President, Stanford Carr. 	The original complaint alleged three
Signed and Filed: September 04, 2009
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
September 08, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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MEMO RE SCD AND CARR’S
MOTION TO DISMISS AM. COMPL.
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claims against SCD and Carr: breach of contract (SCD only); breach
of fiduciary duty; and aiding and abetting senior lender Canyon’s
breach of fiduciary duty. 	On May 8, 2009, the court dismissed CMR’s
claims against SCD and Carr with leave to amend.
On May 29, 2009, CMR filed an amended complaint. 	The amended
complaint alleges the same claims against SCD and Carr: breach of
contract (SCD only); breach of fiduciary duty; and aiding and
abetting Canyon’s breach of fiduciary duty. 	CMR’s amended complaint
newly alleges that HDC’s rights under the Project Management
Agreement were fully assigned to CMR and Canyon pursuant to section
2 of the Project Management Assignment Agreement. 	Am. Compl., ¶ 83;
Opp. to Motion to Dismiss at 4:19-25. 	The amended complaint also
contains new details regarding Carr’s allegedly intentionally false
statements regarding the Project’s financial status, and new
allegations regarding false comparables purportedly used by an
individual hired by SCD to perform a value analysis of the Project.
Id., ¶¶ 39.
Upon due consideration, and for the reasons set forth below,
the amended complaint states a claim for breach of the Assignment
Agreement upon which relief can be granted. 	The amended complaint
fails to state a claim for breach of fiduciary duty or for aiding
and abetting breach of fiduciary duty upon which relief can be
granted. 	The claims for breach of fiduciary duty and for aiding and
abetting are dismissed without leave to amend.
GOVERNING LAW
A. 	Standard of Review
A court should dismiss a complaint if it does not set forth
sufficient factual allegations, if accepted as true, “to state a
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MEMO RE SCD AND CARR’S
MOTION TO DISMISS AM. COMPL.
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claim to relief that is plausible on its face.” 	Bell Atlantic Corp.
v. Twombly, 550 U.S. 544, 555 (2007). 	A claim is plausible when the
facts pleaded allow the court to draw the reasonable inference that
the defendant is liable for the alleged misconduct. 	Id. 	Threadbare
recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice to state a claim for relief.
Id. 	When a complaint pleads facts that are “merely consistent with”
a defendant’s liability, it “stops short of the line between
possibility and plausibility of ‘entitlement to relief.’” Ashcroft
v. Iqbal, 129 S.Ct. 1937, 1949 (2009)(quoting Twombly)).
In ruling upon a motion to dismiss, the court may consider the
contents of documents referred to in 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 Tobacco Co.,
279 F.Supp. 2d 1096, 1102 (D. Ariz. 2003).
If a court dismisses a complaint, leave to amend should be
freely given, unless amendment would be futile. 	Theme Promotions,
Inc. v. News Am. Mkting. FSI, 546 F.3d 991, 1010 (9th Cir. 2008).
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MEMO RE SCD AND CARR’S
MOTION TO DISMISS AM. COMPL.
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B. 	CMR’S Opposition to Motion to Dismiss is not Procedurally
Defective
SCD argues that CMR’s opposition is procedurally defective, in
that the arguments made by CMR are based on facts and law available
to CMR at the time it opposed SCD and Carr’s motion to dismiss the
original complaint. 	Citing Local Rule 7-9(b) and Daghlian v. Devry
Univ., Inc., 2008 U.S. Dist. LEXIS 109147 (C.D. Cal. Feb. 19, 2008),
SCD contends that because CMR cannot “specifically show” that there
is a “material difference in fact or law. . . from that which was
presented to the Court” before entry of the original order, that
there has been “an emergence of new material facts or a change of
law” since the order, or that the court failed “to consider material
facts or dispositive legal arguments which were [previously]
presented,” its arguments in opposition to the motion to dismiss are
procedurally improper. 	The court does not agree.
First, Civil Local Rule 7-9(b) does not apply to bankruptcy
cases or adversary proceedings. 	L.B.R. 1001-2(a). 	Second, and more
importantly, unlike in Daghlian, in which movant sought relief from
summary judgment, CMR is not seeking relief from an order. 	The
court granted CMR leave to amend its original complaint. 	There is
no order or judgment on the amended complaint. 	Accordingly, Rule
60(b) does not apply to CMR’s opposition to the motion to dismiss.
C. 	Rules of Construction of Contracts
The construction and legal effect to be given a contract is
generally a question of law. 	Hanagami v. China Airlines, Ltd., 67
Haw. 357, 364 (1984). 	In construing a contract, the court must
determine the parties’ intent from the four corners of the
agreement, viewing the document as a whole, unless the language is
ambiguous. 	Foundation Int’l., Inc. v. E.T. Ige Const., Inc., 102
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MOTION TO DISMISS AM. COMPL.
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Haw. 487 (2003). 	Ambiguity is found to exist only when the
contract, taken as a whole, is subject to differing interpretations.
Sturla, Inc. v. Fireman’s Fund Ins. Co., 67 Haw. 203 (1984).
APPLICATION OF THE LAW TO FACTS OF CASE
A. 	Claim for Breach of Contract (SCD only)
The Assignment Agreement provides that SCD “agrees and
covenants to perform all of [SCD]’s obligations under the Project
Management Agreement.” 	Assign. Agmt., § 2. 	CMR contends that this
direct promise entitles CMR to assert HDC’s rights under the Project
Management Agreement.
CMR has stated a plausible claim for relief for breach of
contract based on SCD’s direct covenant to CMR to perform SCD’s
obligations under the Project Management Agreement. 	Taking the
allegations in the amended complaint as true, the Assignment
Agreement is reasonably susceptible to the interpretation that SCD’s
contractual obligations included the implied obligation not to drive
down the value of the Project by making intentionally false
statements to potential investors regarding the Project’s value.
CMR has alleged its fraud-based claim for breach of contract
with sufficient particularity, because the amended complaint alleges
when the alleged intentional misstatements were made, who made them,
who heard them, and what specific investors refused to invest in the
Property after hearing the alleged misstatements. 	Am. Compl., ¶¶
39, 84, 87. 	Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-06
(9th Cir. 2003).
For the reasons set forth in the court’s May 8, 2009 Memorandum
Decision (the Decision), CMR has no direct claim for breach of the
Project Management Agreement because: (1) CMR is not a party to the
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MOTION TO DISMISS AM. COMPL.
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Project Management Agreement, (2) CMR is not a third party
beneficiary of the Project Management Agreement, and (3) CMR does
not allege that it or Canyon gave written notice to SCD of Lender’s
election to exercise HDC’s rights under the Project Management
Agreement. 	Decision at pp. 7-9. 	As explained in the Decision,
although the Assignment Agreement provided for a present assignment
of HDC’s rights under the Management Agreement, it also provides
that CMR can assert those rights only after CMR gives SCD written
notice of its election to do so. 	Assign. Agmt., § 1.
CMR argues that it is entitled to sue for breach of the Project
Management Agreement, because Hawaii law allows a party to assign
its rights under a contract without assigning the assignor’s duties
or liabilities under the contract. 	Wohlschlegel v. Uhlmann-Kihei
Properties, Inc., 4 Haw. App. 123, 135-36 (1983). 	The court does
not quarrel with this proposition. 	However, it does not change the
court’s conclusion that CMR may not sue to enforce the Project
Management Agreement, because the Assignment Agreement unambiguously
conditions CMR’s assertion of HDC’s rights under the Project
Management Agreement upon CMR’s written notice of election. 	Assign.
Agmt., § 1.
Nor does the Credit Agreement provide CMR a means for directly
enforcing the Project Management Agreement. 	The Credit Agreement
permits “Lender,” in the Event of Default, to exercise HDC’s rights
under the Project Management Agreement. 	§ 12.2.11. 	The Credit
Agreement also contains a supremacy clause, stating that the
provisions in the Credit Agreement control in the event of a
conflict or inconsistency with a provision in any other Loan
Document. 	§ 14.20. 	CMR argues that the combined effect of these
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MOTION TO DISMISS AM. COMPL.
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provisions is to allow CMR to enforce HDC’s rights under the Project
Management Agreement, without providing a written notice of election
of its intention to exercise those rights following an Event of
Default. 	The court disagrees. 	The general provision in the Credit
Agreement entitling “Lender” to exercise HDC’s rights under the
Project Management Agreement upon an Event of Default, is not
inconsistent with the more specific provision in the Assignment
Agreement requiring CMR to notify HDC in writing of its election to
exercise HDC’s rights under the Project Management Agreement, prior
to CMR having the ability to exercise such rights.
For all these reasons, CMR has stated a plausible claim for
breach of the Assignment Agreement, and has not stated a plausible
claim for breach of the Project Management Agreement.
B. 	Claim for Breach of Fiduciary Duty (SCD)
In support of its claim for breach of fiduciary duty against
SCD, CMR alleges that, as agent of HDC, SCD owed a fiduciary duty
not only to HDC, but also to CMR by virtue of the Project Management
Agreement and the Assignment Agreement. 	Am. Compl., ¶ 87. 	CMR
alleges that SCD breached its fiduciary duty because it engaged in
conduct that effectively 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 costs to build
out the remaining infrastructure and pay off the existing debt. 	Id.
CMR also alleges that, using project funds, SCD contracted with
Ricky Cassidy to perform market studies of homes in similar areas,
and that the studies contained data that was manipulated to give the
impression that the end sales prices of homes would not justify an
investment in the Property beyond the current debt. 	Id. 	CMR
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MEMO RE SCD AND CARR’S
MOTION TO DISMISS AM. COMPL.
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alleges that the studies included homes of inferior quality,
location, community, and desirability. 	Id.
As explained above, CMR is not a party to, or third party
beneficiary of, the Project Management Agreement. 	Although SCD owed
CMR a contractual duty to perform its obligations to HDC under the
Project Management Agreement, and although the Credit Agreement gave
Lender the right to exercise HDC’s rights under the Project
Management Agreement in the Event of Default, 1 these contractual
rights and remedies between CMR and SCD did not create a fiduciary
relationship between SCD and CMR on the basis of agency.
Agency is the fiduciary relationship that arises when one
person (a “principal”) manifests assent to another person
(an “agent”) that the agent shall act on the principal’s
behalf and subject to the principal’s control, and the
agent manifests assent or otherwise consents to act.
Rstmt. Agency (Third), § 1.01.
The amended complaint does not allege that SCD “manifested
assent” to act on behalf of CMR. 	Nor is the Assignment Agreement
reasonably susceptible to such an interpretation. 	The Assignment
Agreement does not provide that SCD is an agent for CMR. 	Rather,
the Assignment Agreement expressly provides that it is an agreement
“for security purposes only” (¶ 15), and that SCD shall continue “to
fulfill its obligations to [HDC]” under the terms of the Project
Management Agreement, unless and until Lender gives written notice
to SCD of its election to exercise HDC’s rights under the Project
Management Agreement. 	¶ 1. 	Neither the original nor the amended
complaint allege that CMR or Canyon ever gave written notice to SCD
of Lender’s election to exercise HDC’s rights under the Project
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2 Assuming, arguendo, the existence of an agency relationship
between SDC and CMR, the claim for breach of fiduciary duty against
SDC fails for the reasons set forth in the Decision, and on the
additional ground that the amended complaint does not allege that
SCD was negligent in hiring Ricky Cassidy, or that SCD participated
in the creation of the market studies written by Cassidy.
MEMO RE SCD AND CARR’S
MOTION TO DISMISS AM. COMPL.
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Management Agreement. 	Because the Assignment Agreement and Project
Management Agreement are not reasonably susceptible to the
interpretation that SCD was CMR’s agent, and because the amended
complaint does not allege that SCD otherwise manifested assent to
act on behalf of CMR, the amended complaint does not allege an
agency relationship. 	Absent a plausible allegation of agency, the
amended complaint cannot state a claim for breach of fiduciary duty
against SCD upon which relief can be granted. 	Rstmt. Agency
(Third), § 1.01. 2 	For this reason, and for the reasons set forth in
the Decision, CMR has failed to state a claim against SCD for breach
of fiduciary duty.
C. 	Breach of Fiduciary Duty (Carr)
CMR alleges that, as agent of HDC, Carr owed a fiduciary duty
not only to HDC, but also to CMR by virtue of the Project Management
Agreement and the Assignment Agreement. 	Am. Compl., ¶ 87. 	CMR
alleges that Carr’s estimates of value regarding the Property were
intentionally, knowingly, and falsely substantially lower than the
true values, as a means of chilling any investors from working with
HDC to develop the Project and with CMR to protect the value of its
note. 	Id., ¶ 87. 	CMR alleges that Carr made oral statements
regarding the Property’s value while in Hawaii in February 2008, and
that such statements were heard by David Choo of CMR and Divco West.
Id., ¶¶ 39, 87. 	CMR alleges that the statements were misleading
because they made it appear there was no value in the Property in
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excess of the debt and that the statements caused potential
investors, such as Divco West, Jager Realty Group, and Forest City
to refuse to entertain investing in the Project. 	Id.
The amended complaint fails to state a claim against Carr upon
which can be granted for the reasons set forth above in Section B,
and for the additional reason that Carr signed the Project
Management Agreement and the Assignment Agreement as the president
and manager of SCD, and not in his individual capacity. 	The amended
complaint does not allege that Carr, as agent for SCD, manifested an
intent to become a party to the Project Management Agreement or the
Assignment Agreement. 	The amended complaint does not allege a claim
to pierce the corporate veil. 	Absent such allegations, Carr cannot
be held liable for breach of the agreements, or for breach of a
fiduciary duty created by the agreements. 	Laeroc Waikiki Parkside,
LLC v. K.S.K. (Oahu) Ltd. Pship., 115 Haw. 201, 213-14 	(2007).
Other than via contract, CMR does not allege any basis for the
creation of a fiduciary duty owed by Carr to CMR. 	Accordingly, and
for the additional reasons stated in the Decision, CMR has failed to
state a claim for breach of fiduciary duty against Carr upon which
relief can be granted.
D. 	Claim for Aiding and Abetting Breach of Fiduciary Duty
CMR alleges that SCD and Carr actively assisted Canyon in
breaching its fiduciary duties for their own financial gain. 	Am.
Compl., ¶ 92. 	Because the court has determined that CMR failed to
state a claim against Canyon for 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.
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Richard B. LeVine, Inc. v. Higashi, 131 Cal. App. 4th 566, 574-75
(2005).
DISMISSAL WITHOUT LEAVE TO AMEND
Except with respect to the claim for breach of the Assignment
Agreement, CMR has failed to allege new, substantive allegations to
support its claims against SCD and Carr, after receiving an
opportunity to amend the original complaint. 	The court has no
reason to believe that CMR would be able to allege new facts to
support its claims for relief if given a third bite at the apple.
Accordingly, and except as to CMR’s claim against SCD for breach of
contract, the amended complaint is dismissed in its entirety,
without leave to amend. 	Allen v. City of Beverly Hills, 911 F.2d
367, 373-74 (9th Cir. 1990) (court has broad discretion to deny
leave to amend when plaintiff has previously amended its complaint).
**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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