Gilbert Unified School District No. 41 v. CrossPointe LLC et al

Filing 54

ORDER: 41 Defendants' Motion to Dismiss Second Amended Complaint Pursuant to Fed. R. Civ. P. 12(b)(6) is granted in part and denied in part. FURTHER ORDERED that the Fourth Claim of the Second Amended Complaint is dismissed without leave to amend. See order for details. Signed by Judge Neil V Wake on 5/2/12. (NKS)

1

WO

2
3
4
5
6

IN THE UNITED STATES DISTRICT COURT

7

FOR THE DISTRICT OF ARIZONA

8
9

Gilbert Unified School District No. 41,
Plaintiff,

10
11

vs.

12
CrossPointe, LLC; Joan M. Keebler,
13
Defendants.
14

)
)
)
)
)
)
)
)
)
)
)
)

No. CV 11-00510-PHX-NVW
ORDER

15
Before the Court is Defendants’ Motion to Dismiss Second Amended Complaint

16
17

Pursuant to Fed. R. Civ. P. 12(b)(6). (Doc. 41.) Plaintiff Gilbert Unified School District

18

No. 41’s request for oral argument will be denied because its written briefing is sufficient

19

and oral argument would not aid determination of the motion. See Fed. R. Civ. P. 78(b);

20

Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998).

21

I.

22

Legal Standard
Dismissal under Fed. R. Civ. P. 12(b)(6) can be based on “the lack of a cognizable

23

legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.”

24

Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). To avoid dismissal,

25

a complaint must contain “only enough facts to state a claim for relief that is plausible on

26

its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial

27

plausibility when the plaintiff pleads factual content that allows the court to draw the

28

1

reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.

2

Iqbal, __ U.S. __, 129 S. Ct. 1937, 1949 (2009).
The principle that a court accepts as true all of the allegations in a complaint does

3
4

not apply to legal conclusions or conclusory factual allegations. Id. at 1949, 1951.

5

“Threadbare recitals of the elements of a cause of action, supported by mere conclusory

6

statements, do not suffice.” Id. at 1949. “A plaintiff’s obligation to provide the grounds

7

of his entitlement to relief requires more than labels and conclusions, and a formulaic

8

recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555.

9

II.

Background

10

On December 9, 2011, after briefing and oral hearing, the District’s claims for

11

conspiracy to defraud and fraudulent inducement to enter into the February 14, 2008

12

Contract1 were dismissed under the economic loss doctrine. (Doc. 36.) The District’s

13

claims for breach of the February 14, 2008 Contract and breach of the duty of good faith

14

and fair dealing arising under the February 14, 2008 Contract were not dismissed. (Id.)

15

The December 9, 2011 Order states in detail facts assumed to be true for purposes of

16

deciding the first motion to dismiss, including lengthy quotes from documents attached to

17

or referenced by the Amended Complaint, which will not be repeated here.

18

On January 13, 2012, the District filed its Second Amended Complaint. (Doc. 38.)

19

The Second Amended Complaint alleges four claims against CrossPointe: (1) breach of

20

the February 14, 2008 Contract; (2) breach of the Master License Agreement; (3) breach

21

of the duty of good faith and fair dealing arising under the February 14, 2008 Contract or

22
23
24
25
26
27
28

1

The Amended Complaint and the December 9, 2011 Order used the term “February
14, 2008 Contract” to refer to a contract allegedly formed by the District accepting Defendant
CrossPointe, LLC’s proposal (“Proposal”) in response to the District’s Request for Proposals
(“RFP”) and which incorporates the terms of the RFP and the Proposal. The Second
Amended Complaint refers to this alleged contract both as the “February 14, 2008 Contract”
and “the Contract.” Here, it is consistently referred to as the “February 14, 2008 Contract”
to distinguish it from the Master License Agreement signed by the District’s assistant
superintendent, Clyde R. Dangerfield, Esq., on February 20, 2008, and by Defendant Joan
Keebler as Chief Executive Officer for CrossPointe on February 26, 2008.
-2-

1

the Master License Agreement; and (4) “contract rescission” because “Keebler’s

2

common-law and procurement fraud induced the District to enter into the February 14,

3

2008 Contract.” In addition, the Second Amended Complaint alleges a claim against

4

Keebler personally for fraudulent inducement to enter into the February 14, 2008

5

Contract.

6

Defendants now move to dismiss the District’s claim against CrossPointe for

7

contract rescission and the claim against Keebler personally for fraudulent inducement as

8

barred by the economic loss doctrine and for failure to plead with sufficient specificity.

9

III.

Analysis

10

A.

11

CrossPointe moves to dismiss the District’s Fifth Claim because rescission is a

The District’s Fifth Claim Will Not Be Dismissed.

12

remedy, not a cause of action. The Fifth Claim, identified as “a contract action for

13

rescission,” alleges that the District was fraudulently induced to enter into the February

14

14, 2008 Contract, the software and services the District received were worthless, and the

15

District has a right to rescind the February 14, 2008 Contract and recover restitution of all

16

amounts it paid to CrossPointe. The First Claim alleges that CrossPointe materially

17

breached the February 14, 2008 Contract by failing to supply the software and services

18

promised, thereby causing the District general, consequential, and incidental damages.

19

The First and Fifth Claims are both pled as contract actions for breach of the February 14,

20

2008 Contract, one seeking damages and the other seeking rescission and restitution. The

21

Second Amended Complaint has one prayer for relief, which seeks judgment “[a]gainst

22

CrossPointe, for general, consequential, incidental, and other damages for breach of

23

contract and bad faith” and “[a]lternatively, against CrossPointe, for rescission of the

24

February 14, 2008 Contract and restitution.” Although it is not necessary to plead two

25

separate claims in order to seek alternative remedies, doing so appears to be harmless

26

duplication. Therefore, the District’s Fifth Claim will not be dismissed.

27
28
-3-

1

B.

The District’s Fourth Claim Will Be Dismissed Without Leave to
Amend.

2
1.
3
4

The District’s Fourth Claim Does Not Satisfy Fed. R. Civ. P.
9(b).

Certain elements of fraud claims must satisfy a higher standard of pleading under

5

the Federal Rules of Civil Procedure. In alleging fraud or mistake, a party may allege

6

malice, intent, knowledge, and other conditions of a person’s mind generally, but must

7

allege the circumstances constituting fraud or mistake with particularity. Fed. R. Civ. P.

8

9(b). Rule 9(b) requires allegations of fraud to be “specific enough to give defendants

9

notice of the particular misconduct which is alleged to constitute the fraud charged so that

10

they can defend against the charge and not just deny that they have done anything

11

wrong.” Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001). Plaintiffs alleging

12

fraud “must state the time, place, and specific content of the false representations as well

13

as the identities of the parties to the misrepresentations.” Schreiber Distrib. Co. v. Serv-

14

Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).
Moreover, to state a claim for common law fraud under Arizona law, a plaintiff

15
16

must plead nine elements:
(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker’s
knowledge of its falsity or ignorance of its truth; (5) the speaker’s intent
that it be acted upon by the recipient in the manner reasonably
contemplated; (6) the hearer’s ignorance of its falsity; (7) the hearer’s
reliance on its truth; (8) the hearer’s right to rely on it; (9) the hearer’s
consequent and proximate injury.

17
18
19
20

Comerica Bank v. Mahmoodi, 224 Ariz. 289, 291-92, 229 P.3d 1031, 1033-34 (Ct. App.
21
2010); see Swartz v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007) (affirming dismissal
22
of common-law fraud claim for failure to plead reasonable reliance as required by state
23
law).
24
The Second Amended Complaint alleges that Keebler made at least four false
25
representations in CrossPointe’s January 10, 2008 Proposal to the District:
26
27

1.
“[N]o customer has failed in their efforts to implement and utilize the
features and benefits of our application suite.”

28
-4-

1

2.
“CrossPointe is currently deployed and operating in a number of
states and is complying with all state requirements. The CrossPointe
database . . . can meet the reporting requirements of the State of Arizona.”

2
3

3.
“CrossPointe Schools OnLine [will] easily meet [Arizona] SAIS
extraction and reporting requirements.”

4
4.
“CrossPointe’s staff has years of experience in converting large
school districts (greater than 100,000 students) with legacy student systems,
such as Pearson’s CIMS system, to CrossPointe’s products including
training all key stakeholders.”

5
6
7

The District alleges that the first statement is false because another school district had

8

sued CrossPointe alleging that the student information system and software had failed.

9

The fact that another district made allegations is not evidence that the allegations were

10
11

true.
The second and third statements predict that CrossPointe’s software can and will

12

meet Arizona state reporting requirements. They may be contractual promises later

13

breached, but no factual allegation supports the District’s naked allegation that these

14

promises were made with the present intention not to perform. Moreover, the District

15

knew at the time they were made that the software did not meet Arizona state reporting

16

requirements and would require custom design and development to do so.

17

The District alleges the fourth statement is false because “[t]he CrossPointe staff

18

assigned to the District’s project did not have years of experience converting large school

19

districts with Pearson’s CIMS system to CrossPointe’s products, nor did the staff have

20

years of experience training key stakeholders.” The fourth statement asserts that

21

“CrossPointe’s staff has years of experience,” not that the staff who would be assigned to

22

the District’s project would have years of experience.

23

Thus, the Second Amended Complaint does not plead facts that support its

24

conclusions that each of the four statements was false and Keebler knew that each

25

representation was false or was ignorant of the truth of the representations when they

26

were incorporated into the Proposal. Further, the Second Amended Complaint includes

27

only threadbare recitals of the other seven elements of common-law fraud. Leave to

28
-5-

1

amend the Fourth Claim would be granted if the economic loss doctrine did not make

2

further amendment futile.

3
4

2.

The Economic Loss Doctrine Bars the District’s Fourth Claim.

Defendants contend that the District’s Fourth Claim against Keebler for fraudulent

5

inducement is barred by the economic loss doctrine, which limits a contracting party to

6

contractual remedies for the recovery of purely economic loss unaccompanied by physical

7

injury to persons or other property. See Flagstaff Affordable Housing Limited

8

Partnership v. Design Alliance, Inc., 223 Ariz. 320, 323, 223 P.3d 664, 667 (2010).

9

Arizona law defines “economic loss” as “pecuniary or commercial damage, including any

10

decreased value or repair costs for a product or property that is itself the subject of a

11

contract between the plaintiff and defendant, and consequential damages such as lost

12

profits.” Id.

13

Application of the economic loss doctrine depends on context-specific policy

14

considerations. Id. at 325, 223 P.3d at 669. Contract law “seeks to encourage parties to

15

order their prospective relationships, including the allocation of risk of future losses and

16

the identification of remedies, and to enforce any resulting agreement consistent with the

17

parties’ expectations.” Id. Tort law promotes safety by deterring accidents and spreads

18

the loss from accidents. Id. In certain contexts, the policies of accident deterrence and

19

loss-spreading will not require permitting tort recovery in addition to contract remedies,

20

and “the policies of the law generally will be best served by leaving the parties to their

21

commercial remedies.” Id. at 669-70.

22

Here, as previously found, both the District and CrossPointe were sophisticated

23

and of equal bargaining power. They anticipated a possible breach of their commercial

24

contract and ordered their prospective relationship, including allocating risks and

25

identifying remedies. The District seeks recovery of purely economic loss

26

unaccompanied by physical injury to persons or other property. Permitting recovery in

27

tort would not promote safety or spread the loss from accidents. Thus, the economic loss

28

doctrine limits the District to contractual remedies for its purely economic loss.
-6-

1

Moreover, casting the fraud claim as fraudulent inducement does not avoid the

2

economic loss doctrine because the allegedly false statements made to induce the District

3

to enter into the February 14, 2008 Contract are part of the contract itself. Even if the

4

statements were false, they are incorporated into the February 14, 2008 Contract as

5

contractual promises for which there are contractual remedies if breached.

6

Focusing the District’s fraudulent inducement claim on Keebler personally instead

7

of on CrossPointe does not avoid the economic loss doctrine, even though Keebler is not

8

a party to a contract with the District. Although the Arizona courts have not addressed

9

this specific issue in a published opinion, the policy considerations identified in Flagstaff

10

support applying the economic loss doctrine to preclude tort recovery against a corporate

11

officer of the contracting party where it precludes tort recovery against the corporate

12

contracting party. See Ben-Yishay v. Mastercraft Dev. LLC, 553 F. Supp. 2d 1360, 1370

13

(S.D. Fla. 2008); Foxworthy, Inc. v. CMG Life Servs., Inc., No. CV11-2682, 2012 WL

14

1269127, at *2-4 (N.D. Ga. April 16, 2012).

15

In Ben-Yishay, the plaintiff’s claims for fraudulent misrepresentation did not give

16

rise to an independent cause of action in tort against a member and officer of the

17

contracting entity because the representations were inseparable from the essence of the

18

contractual agreement and the rationale for applying the economic loss doctrine applied

19

whether the tort claims were asserted against the contracting entity or the corporate

20

officer:

21
22
23
24
25
26
27
28

This analysis is not affected by the fact that Lap, a member of Mastercraft
and officer of MS, was not a signatory of the Agreements. The rationale of
the economic loss rule is to limit a party to the recovery of purely economic
damages suffered in a contractual setting. This rationale, which limits the
Ben-Yishays to the damages recoverable from breach of the Agreements,
applies with equal force whether the fraudulent inducement and
misrepresentation claims are asserted against Mastercraft and MS, or
against Lap. To find otherwise would lead to the incongruous result that the
economic loss rule would bar applicable tort claims against a corporation,
but not against the directors or officers who negotiated the agreement. Such
an outcome would be inconsistent with the rationale of the economic loss
rule and would eviscerate its application in cases where a corporation is a
party to the agreement. . . . Given that a corporation can only act through
its employees, it would completely undermine the contractual privity
economic loss rule to allow any party which contracts with a corporation to
-7-

1
2

avoid the rule by simply bringing its tort claim directly against the corporate
officers or employees tasked with performing the contract on behalf of the
corporation.

3

553 F. Supp. 2d at 1371 (internal quotation marks and citations omitted); accord

4

Foxworthy, 2012 WL 1269127, at *2-4 (applying economic loss doctrine to tort claims

5

against members and officers of the contracting entity who acted on behalf of the

6

contracting entity).

7

Here, too, the alleged misrepresentations are “inseparable from the essence of the

8

contractual agreement.” See Ben-Yishay, 553 F. Supp. 2d at 1370-71. The Second

9

Amended Complaint alleges that CrossPointe materially breached the February 14, 2008

10

Contract by failing to develop and install a student information system that functioned

11

properly and would enable the District to meet the Arizona Student Accountability

12

Information System (“SAIS”) reporting requirements. It further alleges that Keebler

13

made misrepresentations in CrossPointe’s Proposal, which is a part of the February 14,

14

2008 Contract. The misrepresentations include stating that CrossPointe’s student

15

information system would easily meet SAIS requirements and its database could meet

16

Arizona’s reporting requirements.

17

Further, Keebler acted as an officer of and on behalf of CrossPointe. The Second

18

Amended Complaint alleges that “Keebler authored these representations” by

19

communicating them “to other CrossPointe employees with the intent that they would

20

communicate the representations to the District to induce the District to enter the

21

Contract,” “CrossPointe, in fact, published the representations to the District,” “Keebler

22

participated in communicating the representations to the District by signing the RFP

23

submission letter to the District,” and “[i]n the letter, Keebler represented to the District

24

that she had personal knowledge of the proposal’s contents, and she expressly authorized

25

the representations in the proposal” as chief executive officer of CrossPointe.2 The

26

Second Amended Complaint alleges that “CrossPointe knowingly incorporated Keebler’s

27
28

2

Italics in the original.
-8-

1

fraudulent representations into the proposal CrossPointe submitted in response to the

2

RFP” and “Keebler’s fraudulent representations became CrossPointe’s fraudulent

3

representations.”

4

Therefore, the economic loss doctrine bars the District’s fraudulent inducement

5

claim against Keebler because the allegedly false representations are inseparable from the

6

essence of the contractual agreement between the District and CrossPointe, Keebler made

7

them as CrossPointe’s chief executive officer on behalf of CrossPointe, and the doctrine

8

would bar a fraudulent inducement claim against CrossPointe on the alleged facts. The

9

District may not circumvent the economic loss doctrine, which bars tort recovery from

10

CrossPointe, by asserting tort claims against its chief executive officer, who acted on

11

behalf of CrossPointe and whose allegedly false statements were adopted by CrossPointe.

12

Leave to amend should be freely given “when justice so requires.” Fed. R. Civ. P.

13

15(a)(2). Factors to be considered when deciding whether to grant leave to amend

14

include the repeated failure to cure deficiencies by previous amendment and the futility of

15

further amendment. Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th Cir.

16

1989). The district court’s discretion to deny leave to amend a complaint is “especially

17

broad” where the plaintiff already has had one or more opportunities to amend his

18

complaint. Ascon Properties, Inc. v. Mobil Oil Co., 866 F.2d 1149, 1161 (9th Cir. 1989).

19

“Leave to amend need not be given if a complaint, as amended, is subject to dismissal.”

20

Moore, 885 F.2d at 538. Because further amendment of Plaintiff’s Fourth Claim would

21

be futile, it will be dismissed without leave to amend.
IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss Second

22
23

Amended Complaint Pursuant to Fed. R. Civ. P. 12(b)(6) (Doc. 41) is granted in part and

24

denied in part.

25

.....

26

.....

27

.....

28

.....
-9-

1

IT IS FURTHER ORDERED that the Fourth Claim of the Second Amended

2

Complaint is dismissed without leave to amend.

3

DATED this 2nd day of May, 2012.

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
- 10 -