Frank Lloyd Wright Foundation v. Kroeter et al

Filing 60

ORDER granting in part and denying in part 25 Motion to Dismiss Party. Signed by Judge David G Campbell on 12/3/2008.(NVJ)

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

The Frank Lloyd Wright Foundation, an ) ) Arizona non-profit corporation, ) ) Plaintiff, ) ) vs. ) ) ) Steven W. Kroeter, an individual; Archetype Associates, Inc., a New York ) ) corporation; Archetype Associates, a New York general partnership; Steven ) Fields Design Associates, a New York ) ) general partnership, ) ) Defendants. ) )

Nos. CV-08-1112-PHX-DGC CV-08-1125-PHX-FJM ORDER

Defendant Gerald Morosco has filed a motion to dismiss the claims asserted against him by Plaintiff Archetype Associates, Inc. Dkt. #25.1 Archetype has responded to the motion and Morosco has replied. Dkt. ## 36, 40. The Court will dismiss the claim for negligent misrepresentation, but not the claim for fraud. I. Background. The facts in this order are taken from Archetype's First Amended Complaint against Morosco. Dkt. #2 (CV 08-1125). For purposes of this motion, the Court must accept the facts as true. Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996).

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Unless otherwise specified, citations in this order are to the docket in CV 08-1112.

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On November 1, 1983, the Frank Lloyd Wright Foundation ("Foundation") entered into an agreement with Steven Fields Design Associates ("SFDA"), a New York general partnership wholly-owned by Steven W. Kroeter and his wife. Dkt. #2 ¶¶ 9, 16. The agreement designated SFDA as the Foundation's exclusive licensing agent of intellectual property associated with Frank Lloyd Wright. Id. ¶ 16. In 1990, Kroeter began to operate this licensing business as a sole proprietorship under the name "Archetype Associates." Id. ¶ 21. In 1992, Kroeter incorporated Archetype Associates as a New York Corporation. Id. ¶ 22. In 1998, Archetype attempted to terminate its relationship with the Foundation, but agreed to continue the relationship after negotiating with the Foundation and agreeing to an amendment of the initial agreement. Id. ¶ 23. The amendment provided for automatic oneyear renewals of the agreement unless either party elected not to extend the agreement and provided notice to the other party. Id. ¶ 24. The amendment also specified that when the agreement expired, Archetype would receive payments of 25% of the gross licensing fees and royalties received by the Foundation for the first five years following expiration, 20% for the next five years, and 15% for the five years after that. Id. ¶ 25. The agreement required the Foundation to make these payments to Archeype within thirty days after the Foundation received payment from its licensees. Id. ¶ 26. Shortly after the amendment was executed, the Foundation hired new officers who chose not to implement the strategic licensing plan previously proposed by Archetype and approved by the Foundation's Board of Directors. Id. ¶ 27. The new officers also declined to develop a new strategic plan. Id. As a result, in May 2002, Archetype terminated the agreement. Id. The Foundation then established specific accounting procedures to ensure that Archetype received its share of the licensing program revenue as required by the amended agreement. Id. ¶ 34. In 2005, Morosco became chairman of the Foundation's Board of Directors. Id. ¶ 31. During 2006, Archetype expressed concern about the Foundation's failure to make timely payments and to provide accurate information regarding licensing program revenue. Id. ¶ 36. -2-

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On September 21, 2006, the Foundation's CEO, Phillip Allsopp, told Archetype that the Foundation was having serious financial problems. Id. ¶¶ 32, 37. Allsopp requested that Archetype donate its share of licensing program revenue to the Foundation, but Archetype declined. Id. ¶¶ 37, 38. On October 17, 2006, Kroeter met with Allsopp and Morosco in New York. Id. ¶ 39. Allsopp and Morosco acknowledged that the Foundation's obligations to Archetype were legitimate and binding contractual commitments. Id. They also assured Kroeter that the Foundation would honor these commitments. Id. On November 2, 2006, Archetype sent a letter to the Foundation demanding payment for all outstanding amounts as well as accurate documentation for all licensing revenues paid to Archetype. Id. ¶ 40. The Foundation did not comply. Id. In February and May of 2007, the Foundation and Allsopp again acknowledged that the Foundation's obligations under the amendment were legitimate and binding contractual commitments and assured Archetype and Kroeter that the Foundation would honor these commitments. Id. ¶ 41. Despite these assurances, the Foundation has not made payments to Archetype since March 31, 2007, and has not provided an accounting of the licensing program revenue. Id ¶¶ 42, 45. On June 13, 2008, the Foundation filed a complaint against Kroeter, Archetype Associates, Archetype Associates, Inc., and SFDA. Dkt. #1. The Foundation asserts claims for breach of the covenant of good faith and fair dealing, breach of contract, unjust enrichment, breach of fiduciary duty, and declaratory judgment. Id. Shortly thereafter, on June 17, 2008, Archetype filed a separate complaint against the Foundation, Allsopp, and Morosco. Dkt. #2 (CV 08-1125). Against the Foundation, Archetype alleges breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and negligent misrepresentation and asks for an accounting, treble damages pursuant to A.R.S. § 44-1798.02, and a declaratory judgment. Id. Archetype asserts claims of fraud and negligent misrepresentation against Allsopp and Morosco. Id. at 22-25. The cases were consolidated on August 7, 2008. Dkt. #20.

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Morosco asks the Court to dismiss the negligent misrepresentation and fraud claims. Dkt. #25. Morosco bases his motion on four grounds: (1) the economic loss rule bars both claims because Archetype has only suffered economic loss, (2) neither claim is cognizable under Arizona law because a misrepresentation cannot be based on a promise of future performance, (3) Archetype has not sufficiently pled detrimental reliance, and (4) Morosco has a qualified privilege, as a director, to act on behalf of the Foundation. Dkt. #2 at 7-16. II. Standard of Review. When analyzing a complaint for failure to state a claim under Rule 12(b)(6), "[a]ll allegations of material fact are taken as true and construed in the light most favorable to the non-moving party." Smith, 84 F.3d at 1217. "To avoid a Rule 12(b)(6) dismissal, a complaint need not contain detailed factual allegations; rather, it must plead `enough facts to state a claim to relief that is plausible on its face.'" Clemens v. DaimlerChrysler Corp., 534 F.3d 1017, 1022 (9th Cir. 2008) (quoting Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007)). The Court may not assume the plaintiff can prove facts different from those alleged in the complaint. See Associated Gen. Contractors of Cal. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). III. Promise of future performance. Morosco asserts that Arizona law does not provide a claim for misrepresentation based on a promise of future performance. Although both claims against Morosco are based on the same alleged misrepresentations, different standards apply to the claims of negligent misrepresentation and fraudulent misrepresentation. A. Negligent misrepresentation.

Archetype claims that Morosco negligently misrepresented that the Foundation would honor its commitments under the agreement and that Archetype would receive its share of the licensing program revenue. Dkt. #2 ¶ 83. To establish a claim for negligent

misrepresentation in Arizona, Archetype must prove Morosco provided false information intended to guide Archetype, that Archetype justifiably relied on the false information and sustained damages, and that Morosco failed to exercise reasonable care or competence in -4-

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obtaining or communicating the false information. See St. Joseph's Hosp. & Med. Ctr v. Reserve Life Ins. Co., 742 P.2d 804 (Ariz. Ct. App. 1986), rev'd in part on other grounds, St. Joseph's Hosp. & Med. Ctr v. Reserve Life Ins. Co., 742 P.2d 808; Restatement (2d) of Torts § 552 (1977). Citing McAlister v. Citibank, 829 P.2d 1253, 1261 (Ariz. Ct. App. 1992), Morosco asserts that negligent misrepresentation requires a misrepresentation or omission of a fact, and that a promise of future conduct is not a statement of fact. In response, Archetype concedes that there is no exception to the general rule that a promise of future conduct is not capable of supporting a claim for negligent misrepresentation. Dkt. #36 at 7 n.2. Because the alleged promise made by Morosco that the Foundation would honor its contractual commitments is clearly a promise of future conduct, the Court will grant the motion to dismiss the negligent misrepresentation claim. B. Fraud.

A claim for fraud can be based on unfulfilled promises of future performance so long as the statements "`were made with the present intent not to perform.'" McAlister, 829 P.2d at 1260 (quoting Spudnuts v. Lane, 641 P.2d 912, 914 (Ariz. Ct. App. 1982)). Morosco argues that Archetype cannot prove fraud because Arizona courts have applied the present intent exception only where the promise of future performance was made by a party to the underlying the contract. Dkt. #25 at 11. Morosco asserts that because he was not a party to the agreement between Archetype and the Foundation, any reliance by Archetype on his representations would be per se unreasonable. Id. at 12. Morosco fails to cite any legal authority for his assertion that this reliance is unreasonable as a matter of law. Archetype alleges that Morosco made representations that the Foundation would honor its contractual commitments and pay Archetype its share of the licensing program revenue. Dkt. #2 ¶ 79. Archetype alleges that these statements were false, that Morosco knew they were false, and that Archetype rightfully and detrimentally relied on them. Id. ¶ 80. The Court must assume that these statements are true. Smith, 84 F.3d at 1217; see Miree v. DeKalb County, 433 U.S. 25, 27 n.2 (1977). The Court must also assume that all -5-

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general allegations "embrace whatever specific facts might be necessary to support them." Peloza v. Capistrano Unified Sch. Dist., 37 F.3d 517, 521 (9th Cir. 1994) (citations omitted). Morosco was chairman of the Foundation's board of directors when the alleged misrepresentations were made. The Court cannot say at this stage of the litigation that Archetype's reliance on the board chairman's promises was per se unreasonable, even if the chairman was not personally a party to the contract. More must be known about the representations before the Court can conclude whether they induced reasonable reliance, whether they were made solely on behalf of the Foundation, and whether they can give rise to a fraud claim against Morosco personally. IV. Economic loss rule. Morosco asserts that the economic loss rule bars Archetype's fraud claim. Dkt. #25 at 10-11. According to Morosco, the economic loss rule precludes the recovery of purely economic damages in tort unless accompanied by personal injury or property damage. Id. at 7 (citing Carstens v. City of Phoenix, 75 P.3d 1081, 1083 (Ariz. Ct. App. 2004)). Morosco's argument is incorrect. "Tort law has traditionally protected individuals from a host of wrongs that cause only monetary damage[,]" including the torts of fraud and conversion which remedy purely economic losses. Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865, 874 (9th Cir. 2007). This Court has held that "the economic loss rule has no application to the tort of fraud under Arizona law." Moshir v. Patchlink Corp., No. CV-061052-PHX-FJM, 2007 WL 505344 (D. Ariz., Feb. 12, 2007); see also Evans v. Singer, 518 F. Supp. 2d 1134, 1138-47 (D. Ariz. 2007); KD & KD Enter., LLC, v. Touch Automation, LLC, No. CV-06-2083-PHX-FJM, 2006 WL 3808257 (D. Ariz., Dec. 27, 2006) (explaining that such an extension would compromise both the principles underlying the economic loss rule and public policy). V. Plaintiff sufficiently pled detrimental reliance. Morosco contends that the claim for fraud must be dismissed because Archetype has failed to plead reliance sufficiently. Dkt. #25 at 13. Morosco asserts that Archetype has not suffered any independent harm from its reliance on the alleged misrepresentation. Id. at 14. -6-

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Morosco claims that any harm suffered by Archetype is the same harm that would have resulted from breach of the agreement. This is a factual argument not suitable for a motion to dismiss. Archetype has pled that Morosco's alleged misrepresentations induced it to continue negotiations and thereby incur substantial attorneys' fees. Whether Archetype can prove this allegation, and whether the fees truly resulted from Morosco's alleged misrepresentations, are matters to be decided after discovery. VI. There is no privilege to commit fraud. In the interest of allowing directors to work effectively on behalf of a corporation without fear of personal tort liability, the acts of a director are privileged so long as the director acts in good faith and with the belief that his acts were for the lawful interests of the company. See Ong Hing v. Arizona Harness Raceway, Inc., 459 P.2d 107, 115 (Ariz. Ct. App. 1969); see also Albers v. Edelson Tech. Partners L.P., 31 P.3d 821, 826 (Ariz. App. Ct. 2001). While it is true that "directors are generally shielded from liability for acts done in good faith on behalf of the corporation, their status does not shield them from personal liability to those harmed as a result of intentionally harmful or fraudulent conduct." Albers, 31 P.3d at 826. Accepting as true Archetype's allegations that Morosco knowingly made false representations, the director's privilege does not at this stage protect him from liability as a matter of law. IT IS ORDERED that Defendant Morosco's motion to dismiss (Dkt. #25) is granted with respect to negligent misrepresentation and denied with respect to fraud. DATED this 3rd day of December, 2008.

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