California Earthquake Authority v. Metropolitan West Securities LLC, et al

Filing 212

MEMORANDUM and ORDER signed by Chief Judge Morrison C. England, Jr. on 7/2/2014 DENYING plaintiff's 186 Motion for Partial Summary Judgment and defendants' 194 Cross-Motion for Partial Summary Judgment. (Marciel, M)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

EASTERN DISTRICT OF CALIFORNIA

10
11
12

CALIFORNIA EARTHQUAKE
AUTHORITY,
Plaintiff,

13
v.

14
15
16

No. 2:10-cv-00291-MCE-CMK

MEMORANDUM AND ORDER

METROPOLITAN WEST
SECURITIES, LLC; WACHOVIA
BANK, NATIONAL ASSOCIATION;
and DOES 1-25,

17

Defendants.

18
Through this action, Plaintiff California Earthquake Authority (the “CEA”) seeks

19
20

relief from Defendants Metropolitan West Securities, LLC (“MetWest”) and Wells Fargo,

21

N.A., successor by merger to Wachovia Bank, N.A. (“Wachovia”) (collectively,

22

“Defendants”) for the alleged loss of some $47 million resulting from Defendants’

23

investment on behalf of the CEA in commercial paper issued by Mainsail II LLC

24

(“Mainsail”) and that investment’s subsequent collapse. Based on this loss, the CEA

25

asserts claims against Defendants for: (1) breach of contract; (2) breach of fiduciary

26

duty; (3) constructive fraud; and (4) unfair business practices in violation of California

27

Business and Professions Code §§ 17200 et seq.

28

///
1

1

Presently before the Court is the CEA’s motion for summary judgment on the

2

issue of the amount of damages which it will be entitled to, should it prevail on its breach

3

of contract claim and/or its breach of fiduciary duty claim. CEA Mot., ECF No. 186.

4

Defendants timely opposed the motion. Def. Opp’n., ECF No. 193. Defendants also

5

filed a cross-motion on the same issue, Def. Mot., ECF No. 194, to which the CEA filed a

6

timely reply. CEA Opp’n, ECF No. 194.

7
8

BACKGROUND1

9
10

The CEA was created by the California Legislature in the wake of the 1994

11

Northridge earthquake and the ensuing homeowners insurance crisis. The legislation

12

creating the CEA was passed in 1995, 1995 Cal. Legis. Serv. Ch. 944 (A.B. 13)

13

(approved by Governor October 16, 1995), and the CEA formally commenced

14

operations in 1996. The CEA operates as a public instrumentality on a not-for-profit

15

basis and issues earthquake insurance policies for California homes.

16

The CEA initially received capital from participating insurance companies in the

17

form of earthquake insurance premiums and invested that money according to the

18

CEA’s investment philosophy, which prioritized portfolio safety, liquidity and yield. These

19

priorities were intended to allow CEA’s assets to be quickly liquidated and therefore

20

available in the event of an earthquake. CEA later received additional contributions from

21

insurance companies that were added as participants. The CEA also receives revenue

22

through premiums paid on the earthquake insurance policies it issues, as well as

23

through income earned on its invested capital.

24

It is undisputed that in October 1996, the CEA Governing Board, comprised of

25

California’s Governor, Treasurer, and Insurance Commissioner as its three voting

26

members, approved a document entitled “Investment Policies.” This document set forth

27
1

28

These facts are taken from the CEA’s Motion for Summary Adjudication, ECF No. 186, and
Defendants’ Cross-Motion for Summary Adjudication, ECF No. 194.

2

1

specific limitations on CEA investments, including commercial paper investments. The

2

restrictions for commercial paper investments contained therein are as follows:

3

1) Maximum maturity:

4

Statutory:

180 days

5

Policy:

180 days

6

2) Maximum par value, total portfolio:

7

Statutory:

30% of current portfolio

8

Policy:

25%

9

12

a) If over 15% of the portfolio is invested in commercial
paper, the dollar-weighted average maturity of the entire
portfolio cannot exceed 31 days. Dollar-weighted average
maturity means the sum of the amount of each outstanding
commercial paper investment multiplied by the days to
maturity, divided by the total amount of outstanding
commercial paper.

13

3) Maximum par value per name:

14

Statutory:

10% of outstanding

15

Policy:

5%

16

4) Maximum par value per maturity

17

None

18

5) Credit

19

a) Rated A1/P1 or equivalent quality as defined by a
nationally recognized organization that rates such securities.

10
11

20
21
22

b) Organized and operating with the United States.
c) Have total assets in excess of five hundred million dollars
($500,000,000).

23

CEA investments are also governed by California Government Code section 16430. As

24

set forth in the California Insurance Code, “[t]he board [of the CEA] may cause moneys

25

in the fund to be invested and reinvested, from time to time, . . . subject to subdivision (b)

26

of Section 10089.6.” Cal. Ins. Code § 10089.22. Section 10089.6 in turn states that

27

“[t]he investments of the authority shall be limited to those securities eligible under

28

Section 16430 of the Government Code.” Cal. Ins. Code § 10089.6(b)(1). California
3

1

Government Code section 16430 provides guidelines as to “[e]ligible securities for the

2

investment of surplus moneys,” and contains certain requirements for investments in

3

commercial paper. Cal. Gov’t Code §16430(f)(1). Specifically, section 16430(f)

4

provides:

5

Eligible securities for the investment of surplus moneys shall
be any of the following:

6

(f)(1) Commercial paper of “prime” quality as defined by a
nationally recognized organization that rates these securities,
if the commercial paper is issued by a corporation, trust, or
limited liability company that is approved by the Pooled
Money Investment Board [(“PMB”)] as meeting the conditions
specified in either subparagraph (A) or subparagraph (B):

7
8
9
10

(A) Both of the following conditions:

11

(i) Organized and operating within the United States.

12

(ii) Having total assets in excess of five hundred million
dollars ($500,000,000).

13

(B) Both of the following conditions:

14

(i) Organized within the United States as a special
purpose corporation, trust, or limited liability company.

15
16

(ii) Having programwide credit enhancements
including, but not limited to, overcollateralization,
letters of credit, or surety bond.

17
18

(2) A purchase of eligible commercial paper may not do any
of the following:

19

(A) Exceed 180 days' maturity.

20

(B) Represent more than 10 percent of the outstanding paper
of an issuing corporation, trust, or limited liability company.

21
22

(C) Exceed 30 percent of the resources of an investment
program.

23

(3) At the request of the Pooled Money Investment Board, an
investment made pursuant to this subdivision shall be
secured by the issuer by depositing with the Treasurer
securities authorized by Section 53651 of a market value at
least 10 percent in excess of the amount of the state's
investment.

24
25
26
27

Cal. Gov't Code § 16430.

28

///
4

1

The parties dispute to what extent the guidelines covering commercial paper

2

investments contained within the “Investment Policies” adopt the requirements of

3

California Government Code section 16430, and to what extent the Investment Policies

4

reference section 16430.

5

Prior to the Mainsail transaction at issue, MetWest made thousands of

6

investments for the CEA, including multiple commercial paper investments that were not

7

on the Pooled Money Investment Board’s approved list. All of the investments prior to

8

the Mainsail transaction earned a profit for the CEA. On August 8, 2007, MetWest

9

invested $63,251,184.84 of the CEA’s funds in commercial paper issued by Mainsail.

10

However, following a freeze of Mainsail’s assets on August 20, 2007, Mainsail failed to

11

meet its payment obligations to the CEA. The CEA received several distribution

12

payments on its Mainsail holdings in September 2008 and November 2012, totaling

13

$16,054.132.55. Thus, the total lost principal amount is $46,197,052.29.

14
15

STANDARD

16
17

The Federal Rules of Civil Procedure provide for summary judgment when “the

18

movant shows that there is no genuine dispute as to any material fact and the movant is

19

entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v.

20

Catrett, 477 U.S. 317, 322 (1986). One of the principal purposes of Rule 56 is to

21

dispose of factually unsupported claims or defenses. Celotex, 477 U.S. at 325.

22

Rule 56 also allows a court to grant summary judgment on part of a claim or

23

defense, known as partial summary judgment. See Fed. R. Civ. P. 56(a) (“A party may

24

move for summary judgment, identifying each claim or defense—or the part of each

25

claim or defense—on which summary judgment is sought.”); see also Allstate Ins. Co. v.

26

Madan, 889 F. Supp. 374, 378-79 (C.D. Cal. 1995). The standard that applies to a

27

motion for partial summary judgment is the same as that which applies to a motion for

28

summary judgment. See Fed. R. Civ. P. 56(a); State of Cal. ex rel. Cal. Dep’t of Toxic
5

1

Substances Control v. Campbell, 138 F.3d 772, 780 (9th Cir. 1998) (applying summary

2

judgment standard to motion for summary adjudication).

3

In a summary judgment motion, the moving party always bears the initial

4

responsibility of informing the court of the basis for the motion and identifying the

5

portions in the record “which it believes demonstrate the absence of a genuine issue of

6

material fact.” Celotex, 477 U.S. at 323. If the moving party meets its initial

7

responsibility, the burden then shifts to the opposing party to establish that a genuine

8

issue as to any material fact actually does exist. Matsushita Elec. Indus. Co. v. Zenith

9

Radio Corp., 475 U.S. 574, 586-87 (1986); First Nat’l Bank v. Cities Serv. Co., 391 U.S.

10
11

253, 288-89 (1968).
In attempting to establish the existence or non-existence of a genuine factual

12

dispute, the party must support its assertion by “citing to particular parts of materials in

13

the record, including depositions, documents, electronically stored information,

14

affidavits[,] or declarations . . . or other materials; or showing that the materials cited do

15

not establish the absence or presence of a genuine dispute, or that an adverse party

16

cannot produce admissible evidence to support the fact.” Fed. R. Civ. P. 56(c)(1). The

17

opposing party must demonstrate that the fact in contention is material, i.e., a fact that

18

might affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby,

19

Inc., 477 U.S. 242, 248, 251-52 (1986); Owens v. Local No. 169, Assoc. of W. Pulp and

20

Paper Workers, 971 F.2d 347, 355 (9th Cir. 1987). The opposing party must also

21

demonstrate that the dispute about a material fact “is ‘genuine,’ that is, if the evidence is

22

such that a reasonable jury could return a verdict for the nonmoving party.” Anderson,

23

477 U.S. at 248. In other words, the judge needs to answer the preliminary question

24

before the evidence is left to the jury of “not whether there is literally no evidence, but

25

whether there is any upon which a jury could properly proceed to find a verdict for the

26

party producing it, upon whom the onus of proof is imposed.” Anderson, 477 U.S. at 251

27

(quoting Improvement Co. v. Munson, 81 U.S. 442, 448 (1871)) (emphasis in original).

28

As the Supreme Court explained, “[w]hen the moving party has carried its burden under
6

1

Rule [56(a)], its opponent must do more than simply show that there is some

2

metaphysical doubt as to the material facts.” Matsushita, 475 U.S. at 586. Therefore,

3

“[w]here the record taken as a whole could not lead a rational trier of fact to find for the

4

nonmoving party, there is no ‘genuine issue for trial.’” Id. 87.

5

In resolving a summary judgment motion, the evidence of the opposing party is to

6

be believed, and all reasonable inferences that may be drawn from the facts placed

7

before the court must be drawn in favor of the opposing party. Anderson, 477 U.S. at

8

255. Nevertheless, inferences are not drawn out of the air, and it is the opposing party’s

9

obligation to produce a factual predicate from which the inference may be drawn.

10

Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985), aff’d,

11

810 F.2d 898 (9th Cir. 1987).

12
13
14
15

ANALYSIS
A.

The CEA’s Motion
1.

Amount of Damages

16

The CEA states that “[i]f liability is established under either CEA’s breach of

17

contract claim or its breach of fiduciary duty claim, the CEA will be entitled under the law

18

to compensatory damages for the lost principal suffered as a result of the Mainsail

19

investment.” CEA Mot. at 9. In support of this proposition, the CEA cites to California

20

Civil Code section 3300, which provides:

21
22
23
24

[f]or the breach of an obligation arising from contract, the
measure of damages, except where otherwise expressly
provided by this code, is the amount which will compensate
the party aggrieved for all the detriment proximately caused
thereby, or which, in the ordinary course of things, would be
likely to result therefrom.

25

Cal. Civ. Code § 3300. The CEA also cites to California Civil Code section 3333, which

26

provides: “[f]or the breach of an obligation not arising from contract, the measure of

27

damages, except where otherwise expressly provided by this code, is the amount which

28

will compensate for all the detriment proximately caused thereby, whether it could have
7

1

been anticipated or not.” Id. § 3333. The CEA then cites to the indemnity provision in

2

the contract, which, according to the CEA, requires Defendants to indemnify the CEA for

3

any losses or damages, including interest or attorneys’ fees, which arise out of a breach

4

of the Agreement by Wachovia, or which are caused by any negligent acts of omissions

5

by Wachovia relating to its duties under the agreement. The CEA thus contends that,

6

should it prevail on either its breach of contract claim or its breach of fiduciary duty claim,

7

it is entitled to compensatory damages in the amount of $46,197,052.29. According to

8

the CEA, while Defendants may seek to dispute the legality or prudence of the

9

investment at issue, Defendants cannot dispute the amount of the lost principal.

10

Assuming, without deciding, that there is no dispute as to the amount of the loss,

11

the Court declines to grant summary judgment on this issue. The Court is not required

12

to grant summary judgment even when it appears that there is no genuine issue of

13

material fact. See Fed. R. Civ. P. 56 advisory committee's note on 2007 amendments

14

(citing Kennedy v. Silas Mason Co., 334 U.S. 249, 256–57 (1948)) (“It is established that

15

although there is no discretion to enter summary judgment when there is a genuine

16

issue of material fact, there is discretion to deny summary judgment when it appears that

17

there is no genuine issue as to any material fact.”). As the Second Circuit stated in

18

American Manufacturers Mutual Insurance Co. v. American Broadcasting-Paramount

19

Theaters, Inc., this Court is

20
21
22
23
24
25
26

persuaded that a decision after trial will be the more desirable
procedure in the matter. It will serve to bring into sharper
focus certain issues of importance which have been obscured
by the voluminous affidavits with their statements, counterstatements and alternative positions, and the conflicting
conclusions which the parties contend are to be drawn from
the multitude of facts and statistics presented.
Under all the circumstances the application of the summary
judgment rule is questionable and the Court deems it sound
judicial administration to permit a trial for such additional
evidence and clarification as may be relevant.

27

388 F.2d 272, 280 (2d Cir. 1967). Similarly, the Eleventh Circuit has noted that “even in

28

the absence of a factual dispute, a district court has the power to deny summary
8

1

judgment in a case where there is reason to believe that the better course would be to

2

proceed to a full trial.” Lind v. United Parcel Serv., Inc., 254 F.3d 1281, 1285-86 (11th

3

Cir. 2001). Here, the CEA moves for summary judgment as to the damages element of

4

two of their four claims. “Piecemeal adjudication of a portion of [the CEA’s] claims

5

without a fully developed record” and without the benefit of the presentation of evidence

6

at trial, “may complicate rather than simplify the ultimate resolution of the dispute

7

between the parties.” Helios Int'l S.A.R.L. v. Cantamessa USA, Inc., 12 CIV. 8205, 2014

8

WL 2119841 (S.D.N.Y. May 21, 2014) (citing Zamoyski v. Fifty–Six Hope Rd. Music Ltd.,

9

718 F. Supp .2d 128, 140 (D. Mass. 2010) (denying motion for summary judgment

10

where underlying legal questions “must be resolved at a later time upon a more fully-

11

developed record”); N. Am. Roofing Servs. v. Nat'l Trust Ins. Co., 2009 WL 5062080, *1

12

(S.D. Tex. Dec. 16, 2009) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255

13

(1986)) (denying summary judgment motion on discretionary grounds; although “[i]t may

14

well turn out that the Court is simply postponing the inevitable interpretation of the

15

documents, however, testimony in this non-jury trial may be helpful to the Court by

16

shedding some additional light on these issues. Moreover, granting [defendant's] Motion

17

at this time would not resolve [plaintiff's] other claims so as to avoid the upcoming trial”);

18

see also Garter-Bare Co. v. Munsingwear, Inc., 650 F.2d 975, 982 (9th Cir. 1980).

19

It would be unwise to enter summary judgment as to the damages issue alone for

20

the CEA’s breach of contract and breach of fiduciary duty claims. The factual issues

21

going to the amount of damages are closely intertwined with claims and factual issues

22

that remain to be litigated. Thus, the Court exercises its discretion to decline to enter

23

partial judgment under Rule 54(b). The CEA’s motion for adjudication of damages is

24

therefore denied.

25
26

2.

Prejudgment Interest

The CEA also contends that it is entitled to prejudgment interest on the $46

27

million loss amount, on two grounds. First, the CEA argues that under the contract,

28

Defendants must indemnify CEA for “any and all losses, costs, liabilities, damages or
9

1

deficiencies, including interest.” CEA Mot. at 10-11. Second, the CEA points to the

2

California Civil Code, which provides the right to recover interest on damages. See Cal.

3

Civ. Code § 3287.

4

“In diversity cases, state law governs the award of prejudgment interest.” Davis &

5

Cox v. Summa Corp., 751 F.2d 1507, 1522 (9th Cir. 1985). “Under California law,

6

prejudgment interest is governed by Civil Code section 3287 and is recoverable in any

7

action in which damages are certain or ‘capable of being made certain by calculation’

8

and the right to recover such damages is vested in the plaintiff on a particular day.”

9

Cataphora Inc. v. Parker, 848 F. Supp. 2d 1064, 1072 (N.D. Cal. 2012) (citing Cal. Civ.

10

Code § 3287(a); Cortez v. Purolator Air Filtration Prods. Co., 23 Cal.4th 163, 174-75

11

(2000)). Under this code section, “the court has no discretion, but must award

12

prejudgment interest upon request, from the first day there exists both a breach and a

13

liquidated claim.” Howard v. Am. Nat. Fire Ins. Co., 187 Cal. App. 4th 498, 535 (2010)

14

(quoting N. Oakland Med. Clinic v. Rogers, 65 Cal. App. 4th 824, 828 (1998)). Courts

15

generally apply a liberal construction in determining whether a claim is certain or

16

liquidated. Id. (citing Chesapeake Indus., Inc. v. Togova Enter., Inc., 149 Cal. App. 3d

17

901, 907 (1983)). The test for determining certainty under section 3287(a) is whether

18

the defendant knew the amount of damages owed to the claimant or could have

19

computed that amount from reasonably available information. Id. (citing Chesapeake

20

Indus., Inc., 149 Cal. App. 3d at 907). Uncertainty as to the defendant's liability is

21

irrelevant to the determination. Boehm & Assocs. v. Workers' Comp. Appeals Bd.,

22

76 Cal. App. 4th 513, 517 (1999). “The certainty required by section 3287(a) is not lost

23

when the existence of liability turns on disputed facts but only when the amount of

24

damages turns on disputed facts.” Howard, 187 Cal. App. 4th at 536 (citing Olson v.

25

Cory, 35 Cal. 3d 390, 402 (1983)).

26

“The rationale behind the rule is that where a defendant does not know what

27

amount he owes and cannot ascertain it except by accord or judicial process, he cannot

28

be in default for not paying it.” Cataphora, Inc., 848 F. Supp. 2d at 1072
10

1

(citing Conderback, Inc. v. Standard Oil Co., 239 Cal. App. 2d 664, 689-690 (1966)).

2

“Thus, where the amount of damages cannot be resolved except by verdict or

3

judgment, section 3287(a) prejudgment interest is not appropriate.” Id. (citing Wisper

4

Corp. v. Cal. Commerce Bank, 49 Cal. App. 4th 948, 960-61 (1996) (prejudgment

5

interest not awardable on bank's liability for customer damages because portion of

6

damages attributable to bank's negligence not subject to calculation until after trial and

7

determination of relative fault)). However, “[a] defendant’s denial of liability does not

8

make damages uncertain for purposes of Civil Code section 3287.” Id. (citing Stein v.

9

S. Cal. Edison Co., 7 Cal. App. 4th 565, 572 (1992); Marine Terminals Corp. v. Paceco,

10
11

Inc., 145 Cal. App. 3d 991, 995 (1983)).
Thus, the CEA contends that the amount of damages is certain, and Defendants

12

owe the CEA prejudgment interest on the initial loss of $62 million, at a rate of ten

13

percent per annum, from the date the loss was incurred until the date the CEA received

14

workout proceeds. In support of this ten percent figure, the CEA cites to California Civil

15

Code section 3287, which states: “If a contract entered into after January 1, 1986, does

16

not stipulate a legal rate of interest, the obligation shall bear interest at a rate of 10

17

percent per annum after a breach.” Cal. Civ. Code § 3287.

18

However, California Civil Code section 3288, titled “Interest on damages;

19

noncontractual obligation; discretion of jury,” states: “In an action for the breach of an

20

obligation not arising from contract, and in every case of oppression, fraud, or malice,

21

interest may be given, in the discretion of the jury.” Cal. Civ. Code § 3288. This code

22

section applies to determining prejudgment interest for damages for breach of fiduciary

23

duty. See, e.g., Michelson v. Hamada, 29 Cal. App. 4th 1566, 1586-87 (1994).

24

Because the Court cannot determine what amount of damages, if any, stem from

25

the breach of contract claim, and what amount of damages, if any, stem from the breach

26

of fiduciary duty claim, the Court cannot determine the amount of prejudgment interest, if

27

any, which may be awarded. Should damages stem from the breach of fiduciary duty

28

claim, the trier of fact, not the Court, is entitled to determine the amount of prejudgment
11

1

interest for a breach of fiduciary duty claim. Accordingly, because the Court finds that a

2

trial on the issue of damages is more appropriate, and because the amount of interest is

3

contingent upon the outcome of the trial, the CEA’s motion for summary adjudication as

4

to the prejudgment interest is also denied.

5

B.

6

Defendants’ Motion
A.

7

Damages

Defendants contend that they are entitled to summary judgment on the issue of

8

damages because the CEA has failed to prove with reasonable certainty that it has

9

suffered damages. Def. Mot. at 10. Specifically, Defendants argue that the CEA’s claim

10

for compensatory damages should be evaluated on a portfolio-wide basis under Modern

11

Portfolio Theory (“MPT”), which reveals that the CEA did not actually suffer a loss, as the

12

portfolio as a whole was profitable.

13

MPT “focuses on the risk characteristics of each asset not separately, but as it

14

interacts in the portfolio.” Nauzer Balsara, Trust Your Broker?: Suitability, Modern

15

Portfolio Theory, and Expert Witnesses, 17 St. Thomas L. Rev. 173, 176 (2004). ERISA

16

cases apply MPT, pursuant to regulations that require that “the fiduciary shall be

17

required to act as a prudent investment manager under the modern portfolio theory

18

rather than under the common law of trusts standard, which examined each investment

19

with an eye toward its individual riskiness.” Laborers Nat. Pension Fund v. N. Trust

20

Quantitative Advisors, Inc., 173 F.3d 313, 317 (5th Cir. 1999) (citing 29 C.F.R.

21

§ 2550.404a-1). Additionally, several district courts and circuit courts have applied MPT

22

to state and federal substantive law, requiring the aggregation of portfolio-wide gains

23

and losses to judge the overall return of an investment. See Leigh v. Engle, 858 F.2d

24

361, 368 (7th Cir. 1988); Gulf Grp. Holdings, Inc. v. Coast Asset Mgmt. Corp.,

25

516 F. Supp. 2d 1253, 1260-61 (S.D. Fla. Feb. 13, 2007).

26

However, the Court is aware of no California or Ninth Circuit case applying MPT

27

to assess an investment in a non-ERISA case, and Defendants cite to none. Without

28

///
12

1

guidance from the Ninth Circuit, the Court will not apply MPT to the assessment of

2

damages for breach of contract or breach of fiduciary duty claims.

3

Defendants also contend that “California contract law supports measuring

4

damages on a portfolio wide basis.” Def. Mot. at 20. California Civil Code section 3358,

5

titled ‘Limitation of damages; exception,” provides that, “[e]xcept as expressly provided

6

by statute, no person can recover a greater amount in damages for the breach of an

7

obligation, than he could have gained by the full performance thereof on both sides.”

8

Cal. Civ. Code § 3358. California contract law requires as much, in that “[t]he damages

9

recoverable may be subject to deductions for benefits received.” 1 B. Witkin Contracts

10

§ 922.

11

However, the promise between Wachovia and the CEA was continuing and the

12

transactions are divisible, and thus each of Defendants’ failures to perform under the

13

contract results in a new breach, giving rise to a new cause of action. See, e.g., Trs. for

14

Alaska Laborers-Constr. Indus. Health & Sec. Fund v. Ferrell, 812 F.2d 512 (9th Cir.

15

1987) (stating that under contract requiring continuing performance, plaintiff may sue for

16

partial breaches as they occur and failure to make monthly payments in contract

17

requiring continuing performance results in new breach each month). Thus, unlike in

18

Smith v. Mady, 146 Cal. App. 3d 129 (1983), which Defendants cite in support of its

19

contention that damages must be offset by benefits received as a result of the breach, in

20

this case there is not a single and unitary breach at issue in which benefits were

21

received and losses sustained—that is, the CEA did not lose money on the Mainsail

22

investment but somehow also profit from the Mainsail investment. While the CEA’s

23

contract with Wachovia does not necessarily break down in daily or monthly installments,

24

it is ongoing and contains discrete transactions, each of which may constitute a partial

25

breach which is measurable on its own. The benefits received by other non-compliant

26

investments made by Wachovia are separate transactions, which may not be used to

27

offset the losses sustained in the Mainsail transaction.

28

///
13

1

Defendants finally point to California fiduciary law as grounds for its entitlement to

2

summary adjudication. Under California fiduciary law, “[t]he primary object of an award

3

of damages in a civil action, and the fundamental principle or theory on which it is based,

4

is just compensation or indemnity for the loss or injury sustained by complainant, and no

5

more. It follows that if the wrongful act of the defendant at once confers a benefit and

6

inflicts an injury, the loss actually caused will be the net result of the act to the plaintiff;

7

and this net result will be the measure of damages.” In re De Laveaga's Estate, 50 Cal.

8

2d 480, 488 (1958). “An allowance for such benefits is not in the nature of recoupment

9

or set-off, but a method of determining the actual damages sustained.” Id. at 488-89.

10

These principles, according to Defendants, entitle Defendants to offset the CEA’s

11

damages with the gains that the CEA enjoyed under the contract.

12

However, the Restatement (Third) of Trusts provides: “a trustee who is liable for a

13

loss caused by a breach of trust may not reduce the amount of the liability by deducting

14

the amount of a profit that accrued through another and distinct breach of trust; but if the

15

breaches of trust are not separate and distinct, the trustee is accountable only for the net

16

gain or chargeable only with the net loss resulting therefrom.” Restatement (Third) of

17

Trusts § 213. “In other words, a fiduciary is liable for the total aggregate loss of all

18

breaches of trust and may reduce liability for the net loss of multiple breaches only when

19

such multiple breaches are so related that they do not constitute separate and distinct

20

breaches.” Cal. Ironworkers Field Pension Trust v. Loomis Sayles & Co., 259 F.3d

21

1036, 1047 (9th Cir. 2001). Moreover, “[n]otwithstanding the possibility that a fiduciary

22

may be permitted to balance losses and gains attributable to multiple breaches of trust,

23

the comments to § 213 make clear that a fiduciary may not balance losses attributable to

24

a breach of trust against gains attributable to actions which do not involve a breach of

25

trust.” Id. at 1047-48 (emphasis in original). In Cal. Ironworkers Field Pension Trust, the

26

Ninth Circuit held that “even if losses attributable to the breach are more than balanced

27

by gains resulting from appropriate investments, the plan beneficiaries are entitled to ‘the

28

///
14

1

greater profits the Plan might have earned if the Trustees had invested in other Plan

2

assets’ rather than the impermissible assets.” Id.

3

Multitudinous issues of material fact exist which preclude a grant of summary

4

adjudication on this issue. These issues include whether Defendants acted as a trustee

5

for the CEA, whether the breaches are related such that they do not constitute separate

6

and distinct breaches, the amount of damages from the Mainsail transaction, the

7

amount of damages from other breaches (should they be found to be not separate and

8

related transactions), and the greater profits that the CEA might have earned had

9

Defendants invested in permissible assets rather than in Mainsail (should it be found that

10

Mainsail was an impermissible investment). Moreover, for the reasons stated above,

11

even if there were not genuine issues of material fact, the Court would nonetheless find

12

that summary adjudication of the issue of damages is inappropriate in this case.

13
14

Accordingly, Defendants’ motion for summary adjudication on the issue of
damages is denied.

15
16

CONCLUSION

17
18

For the reasons set forth above, IT IS HEREBY ORDERED THAT:

19

1.

20
21
22
23
24

The CEA’s Motion for Partial Summary Judgment on Compensatory
Damages, ECF No. 186, is DENIED; and

2.

Defendants’ Motion for Partial Summary Judgment on Compensatory
Damages, ECF No. 194, is DENIED.

IT IS SO ORDERED.
Dated: July 2, 2014

25
26
27
28
15