Gauba v. Florence Hospital LLC et al

Filing 28

ORDER denying 16 Motion to Dismiss Counts/Claims. Signed by Judge David G Campbell on 6/19/2013.(NVO)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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No. CV12-02439-PHX-DGC

Dinesh Gauba,
Plaintiff,

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v.

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ORDER

Florence Hospital, LLC, an Arizona
Limited Liability Company; Edward
McEachern, as an individual,

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Defendants.

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Before the Court is the motion to dismiss filed by Defendant Edward McEachern.

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Doc. 16. The motion is fully briefed. Doc. 17, 18. No party has requested oral argument.

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For the reasons that follow, the Court will deny the motion.

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I.

Background.

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Plaintiff Dinish Gauba loaned Defendant Florence Hospital, LLC $250,000

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pursuant to a Loan Agreement and Promissory Note (the “loan agreement”) executed by

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McEachern on behalf of Florence Hospital on May 17, 2012. Doc. 15 at ¶¶ 11-12. In

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consideration for the loan, Florence Hospital and McEachern agreed to repay the

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$250,000 plus additional fees in the amount of $62,500, on or before May 25, 2012. Id.

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at ¶¶ 15-16. The loan agreement states that it “is entered into between: BORROWER:

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FLORENCE, HOSPITAL, LLC, . . . and LENDER: Dinesh Gauba.” Doc. 15-1 at 2.

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The loan agreement provides that Florence Hospital “shall be in default if the entire

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indebtedness amount is not paid by 5/25/2012.” Id.

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“Borrower’s Chairman of the Board, Edward McEachern, MD, will personally guarantee

The agreement also provides that

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loan for the term of the note in its principal sum of $250,000, additional fees of $62,500,

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and fees incurred upon the event of Default.”

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“FLORENCE HOSPITAL, LLC, By: Edward McEachern, Manager.” Id at 3.

Id.

The loan agreement is signed

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Plaintiff wire transferred $250,000 to Florence Hospital on May 17, 2012.

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Doc 15 at ¶ 15. Florence Hospital and McEachern failed to repay the loan by May 25,

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2012. Id. at ¶ 17. McEachern sent an email to Plaintiff on July 27, 2012, admitting a

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personal obligation to make payments on the loan. Id. at ¶ 22. Plaintiff’s First Amended

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Complaint (“FAC”) alleges a breach of contract claim against Florence Hospital and

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McEachern, and fraud and promissory estoppel claims against McEachern. Id. at 4-7.

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II.

Legal Standard.

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When analyzing a complaint for failure to state a claim to relief under Rule

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12(b)(6), the well-pled factual allegations are taken as true and construed in the light

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most favorable to the nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th

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Cir. 2009). Legal conclusions couched as factual allegations are not entitled to the

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assumption of truth, Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009), and they are insufficient

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to defeat a motion to dismiss for failure to state a claim, In re Cutera Sec. Litig., 610 F.3d

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1103, 1108 (9th Cir. 2010). To avoid a Rule 12(b)(6) dismissal, the complaint must

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plead enough facts to state a claim to relief that is plausible on its face. Bell Atl. Corp. v.

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Twombly, 550 U.S. 544, 570 (2007).

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‘probability requirement,’ but it asks for more than a sheer possibility that a defendant

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has acted unlawfully.” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 556).

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“[W]here the well-pleaded facts do not permit the court to infer more than the mere

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possibility of misconduct, the complaint has alleged B but it has not ‘show[n]’ B ‘that the

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pleader is entitled to relief.’” Id. at 679 (quoting Fed. R. Civ. P. 8(a)(2)).

This plausibility standard “is not akin to a

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Generally, the Court will not consider evidence or documents beyond the

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pleadings when ruling on a Rule 12(b)(6) motion. Fed. R. Civ. P. 12(d); see also Hal

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Roach Studios, Inc. v. Richard Feiner and Co., Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir.

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1989).

“[M]aterial which is properly submitted as part of the complaint may be
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considered,” Hal Roach Studios, 896 F.2d at 1555 n. 19, and “a document is not ‘outside’

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the complaint if the complaint specifically refers to the document and its authenticity is

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not questioned,” Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994) (overruled on other

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grounds by Galbraith v. Cnty. of Santa Clara, 307 F.3d 1119 (9th Cir. 2002)). Because

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the loan agreement was attached to the complaint (Doc. 15-1 at 1-3), the Court will

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consider it in ruling on McEachern’s motion.

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III.

Plaintiff’s Objection.

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Plaintiff’s objection, which the Court construes as a motion to strike, requests that

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Defendant’s reply (Doc. 18) be struck as untimely. Doc. 19 at 1. Plaintiff’s response to

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the motion to dismiss was filed on April 16, 2013. Doc. 20 at 1. McEachern’s reply was

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filed ten days later on April 26, 2013. Id. Plaintiff argues that Arizona Local Rule 7.2(d)

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allows only seven days for a reply memoranda to be filed, but Plaintiff fails to account

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for Rule 6(d) of the Federal Rules of Civil Procedure, which allow for three extra days to

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file a reply memoranda under Rule 5(b)(2)(e). The reply was timely.

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IV.

McEachern’s Motion.

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A.

Breach of Contract.

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The loan agreement between Plaintiff and Florence Hospital was signed by

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McEachern as an agent to the Hospital. Doc. 15-1 at 3. The agreement was not signed

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by McEachern in his personal capacity. Id. The Arizona statute of frauds provides that

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“[n]o action shall be brought in any court” to enforce a contract “[t]o charge a person

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upon a promise to answer for the debt . . . of another” unless the contract “is in writing

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and signed by the party to be charged.” A.R.S. § 44-101(2). Plaintiff argues that the

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primary purpose exception to the statute of frauds should apply. Doc. 17 at 5.

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McEachern argues that the primary purpose exception does not apply because the

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primary purpose of the loan was not for his benefit. Doc. 16 at 6. The primary purpose

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exception provides that “[w]hen the main purpose of the promisor is not to answer for the

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debt of another, but to obtain a substantial benefit to himself, which he actually secures as

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the consideration for his promise, then not only is the promise valid though oral, it is
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supported by good and sufficient consideration.” Yarbro v. Neil B. McGinnis Equip. Co.,

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420 P.2d 163, 167 (Ariz. 1966). The benefit must be “the primary object of making the

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promise as distinguished from a benefit which is merely incidental, indirect, or remote.”

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Id. at 166.

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The FAC alleges the loan was for McEachern “to make the payroll for his

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hospital, including his earnings.” Doc. 15 at ¶ 6. Plaintiff argues that McEachern

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benefited directly from the agreement because the loan kept the Hospital solvent, and

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McEachern was the sole owner of the Hospital and Chairman of the Board. Doc. 17 at 5.

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The loan, which allowed Florence Hospital to make payroll, had the practical effect of

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allowing McEachern’s business to continue operating. A reasonable inference can be

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drawn that the primary purpose of the personal guarantee was to substantially benefit

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McEachern. Although this ultimately will be a question of fact to be decided during the

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course of this case, the Court concludes that the FAC pleads sufficient facts to state a

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claim for breach of contract against McEachern.

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B.

Fraud.

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Defendant McEachern argues that the fraud claim should be dismissed because

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Plaintiff did not request, and was not granted, leave to add a fraud claim to the FAC.

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Doc. 16 at 11-12. “Rule 15(a) declares that leave to amend ‘shall be freely given when

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justice so requires’; this mandate is to be heeded.” Foman v. Davis, 371 U.S. 178, 182

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(1962). McEachern argues that the Court’s original order provides only that Plaintiff can

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“‘allege more specific facts and additional causes of action that will bind Defendant

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McEachern to the Note.’” Doc. 16 at 11 (citation omitted). But the excerpt quoted is

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from Plaintiff’s response, not the Court’s order. Doc. 12 at 9. The requirement imposed

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by the order was simply that an amended complaint be filed by March 21, 2013.

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Doc. 14 at 6. The order did not limit the causes of action that could be asserted in the

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complaint.

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Defendant McEachern argues that the fraud claim is precluded by the economic

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loss rule. Doc. 16 at 9-11. Economic loss “refers to pecuniary or commercial damage,
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including any decreased value or repair costs for a product or property that is itself the

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subject of a contract between the plaintiff and defendant.” Flagstaff Affordable Housing

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Ltd. P’ship v. Design Alliance, Inc., 223 P.3d 664, 667 (2010). The rule effectively limits

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a contracting party to contractual remedies for losses that are purely economic in nature.

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Id. at 672. Whether the rule precludes a tort claim depends on “the facts of the case while

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bearing in mind that tort law is designed to promote the safety of persons and property

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whereas contract law is designed to protect the parties’ expectations.” Cook v. Orkin

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Exterminating Co., Inc., 258 P.3d 149, 153 (Ariz. Ct. App. 2011).

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McEachern argues that the representations he made were memorialized in the loan

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agreement between Florence Hospital and Plaintiff, so that contractual damages preclude

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tort damages. The economic loss rule, however, is predicated on the existence of a

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binding contract between the two parties. Cook, 258 P.3d at 153. It is not yet clear

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whether an enforceable contract exists between McEachern and Plaintiff. If the statute of

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frauds ultimately applies, there will be no binding contract and tort remedies will not be

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precluded by the economic loss rule. At this stage, the Court cannot dismiss the fraud

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claim on the basis of the rule.

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In Arizona, there are nine elements required to prove actionable fraud: (1) a

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representation, (2) its falsity, (3) its materiality, (4) the speaker’s knowledge of its falsity

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or ignorance of its truth, (5) the speaker’s intent that it should be acted upon by the hearer

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and in a manner reasonably contemplated, (6) the hearer’s ignorance of the falsity, (7) the

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hearer’s reliance on the representation’s truth, (8) his right to rely thereon, and (9) his

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consequent and proximate injury. Wagner v. Casteel, 663 P.2d 1020 (Ariz. Ct. App.

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1983). Defendant McEachern argues the fraud claim should be dismissed because the

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FAC fails to state that Plaintiff was ignorant as to the falsity of the representations.

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Although the FAC does not explicitly allege that Plaintiff was ignorant as to the falsity of

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the representations, it does allege that McEachern made misrepresentations which

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induced Plaintiff to sign the loan agreement.

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inference can be made that Plaintiff would not have signed the loan agreement had he
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Doc. 15 at ¶¶ 33-44.

A reasonable

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known that the representations made by McEachern were false. Plaintiff’s ignorance as

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to the falsity of the representations can be inferred from the facts pled.

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Defendant McEachern argues that many of the representations alleged in the FAC

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cannot support a fraud claim because they are future promises or events. Arizona law

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does not allow fraud to be based on representations which are “unfulfilled promises,

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expressions of intention or statements concerning future events unless such were made

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with the present intent not to perform.” Spudnuts, Inc. v. Lane, 641 P.2d 912, 914 (Ariz.

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Ct. App. 1982). “[A]n intent not to perform or to deceive must be established

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independent of a showing of the defendant’s failure to perform.” McAlister v. Citibank,

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829 P.2d 1253, 1260 (Ariz. Ct. App. 1992).

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In the FAC, Plaintiff lists seven representations which McEachern categorizes as

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promises of future performance or events: (1) McEachern would personally guarantee

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the loan; (2) the loan would be used to make payroll; (3) the loan would not go into

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default; (4) Florence Hospital would not dissolve; (5) the loan would be paid back in a

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week; (6) shares would be transferred into escrow; and (7) Plaintiff would have first

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administrative rights to post-petition collateral. Doc. 15 at ¶¶ 34- 36, 38-41. These

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representations are dependent on Florence Hospital or McEachern’s future actions, but

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the FAC alleges that “Defendant McEachern also knew that the representations he made,

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as stated in this Complaint, were false at the time he made them[.]” Doc. 15 at ¶ 43.

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These allegations, taken as true, are sufficient to state a claim.

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C.

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Arizona has adopted Section 90(1) of the Restatement (Second) of Contracts.

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Double AA Builders, Ltd. v. Grand State Const. L.L.C., 114 P.3d 835, 838 (Ariz. Ct. App.

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2005). That section provides that “[a] promise which the promisor should reasonably

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expect to induce action or forbearance on the part of the promisee or a third person and

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which does induce such action or forbearance is binding if injustice can be avoided only

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by enforcement of the promise.” Id.

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Promissory Estoppel.

Defendant McEachern argues that promissory estoppel is not pled in the
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alternative and can only be brought in the absence of a contractual remedy. Promissory

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estoppel is pled in the FAC as a separate count, which is sufficient to state it as an

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alternative claim.

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McEachern and Plaintiff has not yet been decided. If no such contract exists, promissory

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estoppel may be available.

In addition, whether an enforceable contract exists between

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The FAC alleges that McEachern promised to guarantee the loan and promised,

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upon default, to transfer ten shares worth approximately $32,500 per share to the Plaintiff

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each week. Doc. 15 at ¶¶ 48-49. The FAC also alleges that because of McEachern’s

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promises “it was both reasonable and foreseeable for Plaintiff to rely.” Doc. 15 at ¶ 50.

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Finally, the reasonably expected action was induced, as the loan agreement was signed

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and $250,000 was lent by Plaintiff to Florence Hospital. All elements of promissory

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estoppel are properly pled.

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D.

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Defendant McEachern argues that punitive damages must be dismissed because

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the fraud claim is inadequate. Because the fraud claim has been found sufficient, this

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argument provides no basis for dismissal.

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Punitive damages must be dismissed.

IT IS ORDERED that Defendant McEachern’s motion to dismiss (Doc. 16) is
denied.
Dated this 19th day of June, 2013.

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