Goldman et al v. Seawind Group Holdings Pty Ltd et al

Filing 50

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS 15 15 (Illston, Susan) (Filed on 8/29/2013)

1
2
3
4
5

IN THE UNITED STATES DISTRICT COURT

6

FOR THE NORTHERN DISTRICT OF CALIFORNIA

7
8

WAYNE GOLDMAN; HARRIET SCANNON,

9
United States District Court
For the Northern District of California

10
11
12
13

Plaintiffs,

No. CV 13-01759 SI
ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANTS’
MOTION TO DISMISS

v.
SEAWIND GROUP HOLDINGS PTY LTD., et
al.,
Defendants.

/

14
Currently before the Court is defendants’ motion to dismiss plaintiffs’ complaint pursuant to
15
Federal Rule of Civil Procedure 12(b)(6) and for lack of personal jurisdiction. Pursuant to Civil Local
16
Rule 7-1(b), the Court finds this matter suitable for disposition without oral argument and therefore
17
VACATES the hearing currently scheduled for August 30, 2013. Having carefully considered the
18
papers submitted, the Court GRANTS IN PART and DENIES IN PART defendants’ motion to dismiss,
19
for the reasons set forth below.
20
21
BACKGROUND
22
Plaintiffs, a husband and wife, filed this suit against defendants alleging a breach of contract for
23
the construction of a yacht. Defendant Koch was the director and sole proprietor of defendants Corsair
24
Marine, Inc.; Corsair Marine Sales Pte Ltd.; Corsair Marine International Pte Ltd; and Corsair Marine
25
International Co., Ltd (collectively “the Corsair companies”). Compl. ¶¶ 5-9. Defendant Ward is the
26
director and sole proprietor of defendant Seawind Group Holdings Pty Ltd (“Seawind”), and Ward also
27
does business as Seawind Catamarans Pty Ltd, Shipcove Pty Ltd, and Seawind Catamarans. Id. ¶¶ 3-4.
28

1

Ward and Seawind now own the Corsair companies. Id. ¶¶ 3, 12, 36, 39, 45.

2

Plaintiffs allege that they contracted to purchase a “Corsair 50,” a 50-foot catamaran and one

3

of the first in its line, for $700,000. Id. ¶ 22. They paid a $70,000 deposit, and signed a Sales Contract

4

with Corsair Marine Inc. on June 15, 2007. Id. ¶¶ 23-24; Ex. 3. Plaintiffs wired a series of progress

5

payments to: Corsair Marine, Inc.; Corsair Marine International Co. Inc.; and Corsair Marine Sales Pte

6

Ltd. Id. ¶ 26. Plaintiffs allege they paid a total of $520,000 to the Corsair companies. Id.
Under the terms of the Sales Contract, the Corsair 50 was scheduled to be completed by August

8

30, 2008. Id. ¶ 27. After a series of delays, on October 9, 2009, plaintiffs contacted Koch to express

9

concerns regarding the delays, the workmanship, and over the financial viability of the Corsair

10
United States District Court
For the Northern District of California

7

companies. Id. ¶¶ 27-29. On November 10, 2009, plaintiffs entered into an Addendum to the Sales

11

Contract with “Corsair Marine International Singapore Ltd” and “Corsair Marine Vietnam Ltd,” which

12

plaintiffs aver upon information and belief are non-existent companies. Id. ¶¶ 30-32; Ex. 7.

13

Plaintiffs learned that Ward and Seawind had offered to acquire the Corsair companies, but had

14

purported to limit their liability to the Corsair 50 owners to $250,000 each. Id. ¶ 36. In September

15

2010, plaintiffs filed a suit against Corsair Marine Inc., Corsair Marine Sales Pte Ltd., and Corsair

16

Marine International Pte Ltd. in the High Court of Singapore. Id. ¶ 37. They obtained a default

17

judgement against these defendants in the amount of $969,195, and an injunction against the acquisition

18

by Seawind. Id. ¶¶ 37-38. After negotiations, Ward on behalf of Seawind promised to pay plaintiffs

19

$50,000 and complete their catamaran within 6-9 months, in exchange for a release from the injunction

20

so that the purchase of the Corsair companies could be completed. Id. ¶¶ 39-42; Ex. 11. The “Mareva

21

Agreement” was signed October 6, 2010. Id., Ex. 11.

22

However, Seawind did not begin work on plaintiffs’ catamaran until July 2011, which under the

23

Mareva Agreement was when the yacht should have been completed. Id. ¶ 44. On February 3, 2012,

24

plaintiffs instituted arbitral proceedings against Seawind and Ward. Id. ¶ 57. Then on August 17, 2012,

25

Seawind declared bankruptcy. Id. ¶¶ 46, 60. The arbitrator declared that Ward and Seawind could not

26

be made parties to the arbitration because they were not signatories to an arbitration agreement. Id. ¶

27

60. Plaintiffs entered into a Settlement Agreement with Koch and the Corsair companies that required

28

those entities to complete the yacht. Id. ¶ 62, Ex. 14. On August 6, 2012, plaintiffs signed a
2

1

Clarification Addendum that confirmed that Koch had the authority to enter into the agreement and

2

added that time was of the essence. Id. ¶ 63, Ex. 15.

3

On October 1, 2012, after learning that work on the Corsair 50 had not even begun, plaintiffs

4

sent a notice terminating the Settlement Agreement due to defendants’ alleged breach. Id. ¶ 65. On

5

March 18, 2013, they filed suit in this Court. The complaint asserts eight causes of action: (1) breach

6

of contract – the Sales Agreement and Addendum, (2) breach of contract – the Mareva Agreement, (3)

7

breach of contract – the Settlement Agreement, (4) conversion, (5) unfair competition in violation of

8

California Business and Professions Code section 17200, (6) fraud, (7) promissory fraud, and (8) breach

9

of the implied covenant of good faith and fair dealing.

United States District Court
For the Northern District of California

10

Defendants argue that the case should be dismissed against defendant Ward because the Court

11

lacks personal jurisdiction over him and service of process was insufficient; that no relief can be granted

12

as to defendant Seawind because it has declared bankruptcy; and that claims 1, 2, 5, 7, and 8 should be

13

dismissed against the remaining defendants for failure to state a claim.

14
15
16

LEGAL STANDARD
1.

Personal Jurisdiction

17

Personal jurisdiction over a nonresident defendant may exist if the defendant has either a

18

continuous and systematic presence in the state (general jurisdiction), or minimum contacts with the

19

forum state such that the exercise of jurisdiction “does not offend traditional notions of fair play and

20

substantial justice” (specific jurisdiction). Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)

21

(citation omitted). Where there is no federal statute applicable to determine personal jurisdiction, a

22

district court should apply the law of the state where the court sits. See Schwarzenegger v. Fred Martin

23

Motor Co., 374 F.3d 797, 800 (9th Cir. 2004). California law requires only that the exercise of personal

24

jurisdiction comply with federal due process requirements. See id. at 800-01.

25
26

2.

Failure to State a Claim

27

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it

28

fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss,
3

1

the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl.

2

Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “facial plausibility ” standard requires the plaintiff

3

to allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.”

4

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Although courts do not require “heightened fact pleading

5

of specifics,” Twombly, 550 U.S. at 544, a plaintiff must provide “more than labels and conclusions, and

6

a formulaic recitation of the elements of a cause of action will not do,” id. at 555. The plaintiff must

7

allege facts sufficient to “raise a right to relief above the speculative level.” Id.
In deciding whether the plaintiff has stated a claim, the Court must assume that the plaintiff’s

9

allegations are true and must draw all reasonable inferences in his or her favor. Usher v. City of Los

10
United States District Court
For the Northern District of California

8

Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to accept as true

11

“allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.”

12

St. Clare v. Gilead Scis., Inc., 536 F.3d 1049, 1055 (9th Cir. 2008). Moreover, “the tenet that a court

13

must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”

14

Iqbal, 556 U.S. at 678. In considering a motion to dismiss, the court may take judicial notice of matters

15

of public record outside the pleadings. See MGIC Indemn. Corp. v. Weisman, 803 F.2d 500, 504 (9th

16

Cir. 1986).

17

If the Court dismisses a complaint, it must decide whether to grant leave to amend. The Ninth

18

Circuit has “repeatedly held that a district court should grant leave to amend even if no request to amend

19

the pleading was made, unless it determines that the pleading could not possibly be cured by the

20

allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (citations and internal

21

quotation marks omitted).

22
23
24

DISCUSSION
1.

Jurisdiction Over Defendant Ward

25

A.

26

Defendants argue that this Court lacks personal jurisdiction over defendant Ward, a resident of

27

Australia and the sole proprietor of Seawind. It is undisputed that the Court has personal jurisdiction

28

over Seawind and the Corsair companies, which sell boats in California and have a dealership in

Personal Jurisdiction

4

1

Alameda, California. Additionally, the Corsair companies sold the Corsair 50 to plaintiffs in California,

2

and the Sales Contract contains a forum selection clause which provides for resolution of all disputes

3

in California. Defendant Ward admits that he travels to California, but argues that his travels are solely

4

in a business capacity for Seawind or the Corsair companies. See Ward Decl. ¶¶ 5-6 (declaring “I

5

conduct no personal business [in the United States]” and that “[t]he only business I conduct in the

6

United States is performed on behalf of [Seawind and the Corsair companies], and in my capacity as an

7

officer of those corporations.”).
If a corporation is the alter ego of an individual defendant, or one corporation is the alter ego of

9

another, a court may “pierce the corporate veil” and attribute the “contacts” of the corporation to the

10
United States District Court
For the Northern District of California

8

individual. Certified Building Products, Inc. v. NLRB, 528 F.2d 968, 969 (9th Cir.1976); see also Harris

11

Rutsky & Co. Ins. Servs., Inc. v. Bell & Clements Ltd., 328 F.3d 1122, 1134 (9th Cir. 2003). Thus, if

12

plaintiffs have made a prima facie showing that Ward is the alter ego of Seawind or the Corsair

13

companies, then this Court has personal jurisdiction over him.

14

To make a prima facie showing that Ward is an alter ego of the companies, plaintiffs must show:

15

“(1) that there is such unity of interest and ownership that the separate personalities of the two entities

16

no longer exist and (2) that failure to disregard their separate identities would result in fraud or

17

injustice.” Doe v. Unocal Corp., 248 F.3d 915, 926 (9th Cir. 2001) (citation and quotation omitted).

18

When courts consider the alter ego doctrine they look to numerous factors, including inadequate

19

capitalization, commingling of funds and other assets, the holding out by one entity that it is liable for

20

the debts of the other, identical equitable ownerships, use of the same offices and employees, use of one

21

as a mere conduit for the affairs of the other, disregard of corporate formalities, lack of segregation of

22

corporate records, and identical directors and officers. VirtualMagic Asia, Inc. v. Fil–Cartoons, Inc.,

23

99 Cal. App. 4th 228, 245 (2002).

24

The complaint alleges that Seawind is the successor-in-interest to the Corsair companies.

25

Compl. ¶ 45. Ward is the sole proprietor of Seawind, and also serves its Director and Secretary. Id. ¶

26

68. The complaint also alleges a failure to follow corporate formalities, such as a failure to report the

27

acquisition of the Corsair companies, and a failure to file an annual report since 2002. Id. Additionally,

28

the complaint alleges that the Corsair companies and Seawind were undercapitalized, which caused
5

1

them to eventually file for bankruptcy. Id. ¶¶ 46, 60, 68. Finally, the complaint alleges that Ward used

2

the corporate shield to insulate himself and his companies by holding out Shipcove Pty Ltd, which he

3

also owns, as the entity responsible for the completion of plaintiffs’ catamaran. Id. ¶ 69. Accordingly,

4

the Court finds that plaintiffs have made a prima facie showing that there is a unity of interest between

5

Ward, Seawind, and the Corsair companies.

6

Second, plaintiffs have also made a prima facie showing that failure to disregard their separate

7

identities would result in fraud or injustice. Plaintiffs may have no other recourse to recoup any

8

damages they suffered other than from Ward in his individual capacity, as Seawind has declared

9

bankruptcy.

United States District Court
For the Northern District of California

10
11

Accordingly, plaintiffs have made a prima facie showing that Ward is the alter ego of Seawind
and the Corsair companies, and therefore the Court has personal jurisdiction over him.

12
13

B.

14

Second, Ward argues that service of process upon him using FedEx was improper. This method

15

of service was specified in the Sales Contract. Compl., Ex. 3 ¶ 10.4. As the Court has found that

16

plaintiffs have made a prima facie case that Ward is an alter ego of the Corsair companies, then he is

17

subject to the terms of this agreement, including the clause providing for service of process via FedEx.

Service of Process

18
19

2.

Failure to State a Claim

20

A.

21

Defendant Seawind argues that no claim of relief can be brought against it because it has already

22

passed through the Australian equivalent of bankruptcy, and therefore it is no longer liable for the claims

23

alleged in the complaint. However, the complaint does not state whether Seawind has been fully

24

discharged from bankruptcy or which of its debts were disclosed. The assertion of an affirmative

25

defense in a motion to dismiss “depends on whether the allegations in the complaint suffice to establish

26

that ground.” Jones v. Bock, 549 U.S. 199, 215 (2007). The Court finds that the statements in the

27

complaint regarding Seawind’s bankruptcy are insufficient to establish that it cannot be found liable for

28

the claims alleged in the complaint.

The Claims of Relief Against Defendant Seawind

6

1
2

B.

3

Plaintiffs allege that defendants Koch, the Corsair companies, Ward, and Seawind breached the

4

Sales Agreement, as modified by the Addendum. Compl. ¶¶ 80-85. First, defendants argue that the only

5

defendant which signed the Sales Agreement was Corsair Marine Sales Pte Ltd., and therefore the

6

remaining defendants are not liable for this alleged breach. However, as discussed supra, plaintiffs have

7

alleged sufficient facts to assert that Seawind is the successor to the Corsair companies, and Ward is the

8

alter ego of these companies. Additionally, plaintiffs state sufficient facts to allege that the Corsair

9

companies were mistakenly omitted due to the fraud of Koch, and therefore the contract should be

United States District Court
For the Northern District of California

10

First Cause of Action, Breach of the Sales Agreement

reformed. See Compl. ¶¶ 31-32.

11

Second, defendants argue that this cause of action is barred by res judicata, because plaintiffs

12

obtained a judgment in a Singapore court against Corsair Marine Sales Pte Ltd and Corsair Marine

13

International Pte Ltd. However, as defendants admit, there is no preclusive effect against the remaining

14

defendants, because they were not parties to the Singapore litigation. “Res judicata, also known as

15

claim preclusion, bars litigation in a subsequent action of any claims that were raised or could have been

16

raised in the prior action.” W. Radio Servs. Co. v. Glickman, 123 F.3d 1189, 1192 (9th Cir.1997). “The

17

elements necessary to establish res judicata are: (1) an identity of claims, (2) a final judgment on the

18

merits, and (3) privity between parties.” Headwaters Inc. v. U.S. Forest Serv., 399 F.3d 1047, 1052 (9th

19

Cir. 2005) (quotation marks and citation omitted); see id. A final judgement on the merits must have

20

been actually litigated; an issue decided by default is not considered a litigated issue.

21

RESTATEMENT OF JUDGMENTS § 27 cmt. e (1982) (“In the case of a judgment entered by confession,

22

consent, or default, none of the issues is actually litigated. Therefore, the rule of this Section does not

23

apply with respect to any issue in a subsequent action.”). The Singapore court entered a default

24

judgment, not a decision on the merits as required to give the decision preclusive effect. Thus, this

25

claim cannot be dismissed on the basis of res judicata.

See

26

Third, defendants argue that the first cause of action is precluded by the subsequent Mareva

27

Agreement, which bars the pursuit of claims against Seawind, Koch, or the Corsair companies.

28

However, plaintiffs have alleged that the Mareva Agreement is unenforceable because it was procured
7

1

by promissory fraud, and it was incapable of being performed. As discussed infra, plaintiffs have pled

2

sufficient facts to state a cause of action that this agreement is unenforceable.

3
4

Therefore, the Court finds that plaintiffs have sufficiently pled enough facts to make a claim for
breach of the Sales Agreement that is plausible on its face.

5
C.

7

Defendants argue that the second cause of action is precluded by the Mareva Agreement’s

8

arbitration clause, and thus this cause of action must be dismissed. The Federal Arbitration Act

9

(“FAA”) espouses a general policy favoring arbitration agreements. AT&T Mobility LLC v. Concepcion,

10
United States District Court
For the Northern District of California

6

131 S. Ct. 1740, 1746 (2011); Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25

11

(1983). Federal courts are required to rigorously enforce an agreement to arbitrate. See Hall Street

12

Assoc., L.L.C. v. Mattel, Inc., 552 U.S. 576, 582 (2008). However, the strong presumption in favor of

13

arbitration “does not confer a right to compel arbitration of any dispute at any time.” Volt Info.

14

Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 474 (1989). Arbitration

15

agreements may be invalidated by “‘generally applicable contract defenses, such as fraud, duress, or

16

unconscionability.’” AT&T Mobility LLC, 131 S. Ct. at 1746 (quoting Doctor’s Assoc., Inc. v.

17

Casarotto, 517 U.S. 681, 687 (1996)). Whereas the validity or enforceability of a contract containing

18

an arbitration provision is an issue for a court to decide, it is settled law in this Circuit that disputes as

19

to the scope of the parties’ agreement to arbitrate is for the arbitrator, not the Court. See Cox v. Ocean

20

View Hotel Corp., 533 F.3d 1114, 1119-20 (9th Cir. 2008).

Second Cause of Action, Breach of the Mareva Agreement

21

Pursuant to the Mareva Agreement, any breach of contract claim must be heard by an arbitrator.

22

Plaintiffs argue that the arbitration clause in invalid because Mareva agreement was procured by

23

promissory fraud and was incapable of being performed. However, this argument would invalidate the

24

entire contract, and thus plaintiffs would not have a right to relief under a breach of contract theory.

25

Moreover, if plaintiffs were to allege that only the arbitration clause was invalid, that argument could

26

not be heard by this Court – the scope of the arbitration clause must be decided by the arbitrator. Thus,

27

this claim cannot be heard in this Court, and cannot be stated in a matter on which relief may be granted.

28

Accordingly, the second cause of action is DISMISSED WITHOUT LEAVE TO AMEND.
8

1

D.

2

The fifth cause of action alleges that defendants violate California’s Unfair Competition Law

3

(“UCL”), which prohibits any “unlawful, unfair, or fraudulent business act or practice.” Cal. Bus. &

4

Prof. Code § 17200. The complaint alleges that defendants violate the UCL because they “hold

5

themselves out to the public as ‘Corsair Marine International,’ but then instruct customers to wire

6

monies to, and enter into contracts with, various legal entities that are fronts for the personal business

7

activities” of Koch and Ward. Compl. ¶ 107. Furthermore, the complaint alleges that defendants breach

8

the contracts and avoid liability by being intentionally undercapitalized, failing to comply with corporate

9

formalities, shifting liability between entities, and having customers enter into transactions with non-

United States District Court
For the Northern District of California

10

Fifth Cause of Action, Unfair Competition

existent entities. Id.

11

The term “fraudulent” in the UCL “does not refer to the common law tort of fraud but only

12

requires a showing members of the public are likely to be deceived.” Saunders v. Superior Court, 27

13

Cal. App. 4th 832, 839 (1994); see also Boschma v. Home Loan Center, Inc., 198 Cal. App. 4th 230,

14

252-53 (2011) (“A common law fraudulent deception must be actually false, known to be false by the

15

perpetrator and reasonably relied upon by a victim who incurs damages. None of these elements are

16

required to state a claim for relief under the UCL.”). However, the heightened pleading standard for

17

fraud claims under Federal Rule of Civil Procedure 9(b) applies to the UCL. Kearns v. Ford Motor Co.,

18

567 F.3d 1120, 1125 (9th Cir. 2009). “Rule 9(b) demands that the circumstances constituting the

19

alleged fraud be specific enough to give defendants notice of the particular misconduct so that they can

20

defend against the charge and not just deny that they have done anything wrong.” Id. (quotations and

21

citations omitted).

22

The complaint specifically alleges the actions that defendants took which would likely deceive

23

the members of the public: they hold themselves out to the public as “Corsair Marine International,” but

24

then instruct customers to contract and transact with other entities that are merely “fronts” for the

25

individual defendants. Then, the complaint lists specific methods through which defendants have

26

allegedly deceived the public to avoid liability for breached contracts, such as being intentionally

27

undercapitalized, failing to comply with corporate formalities, shifting liability between entities, and

28

having customers enter into transactions with non-existent entities. This is sufficiently specific for
9

1

defendants to be on notice of the particular misconduct they have committed, so that they can defend

2

against the charge by more than a mere blanket denial. Moreover, plaintiffs do not need to allege that

3

defendants had a duty to disclose the fraud, as defendants argue. Such a duty is only required when the

4

fraud was an act of omission. Here, the alleged acts of fraud were not acts of omission but affirmative

5

misstatements and deceptive actions. Thus, plaintiffs have plead sufficient facts to state a claim under

6

the UCL.

7
E.

9

Plaintiffs allege that defendant Ward committed promissory fraud because, when he promised

10
United States District Court
For the Northern District of California

8

plaintiffs he would complete the construction of their Corsair 50 in return for a release of the Mareva

11

injunction, he never intended to keep that promise. Compl. ¶¶ 118-123. “Fraudulent intent must often

12

be established by circumstantial evidence, and may be inferred from such circumstances as defendant’s

13

failure even to attempt performance.” Locke v. Warner Bros., Inc., 57 Cal. App. 4th 354, 368 (1997)

14

(citations and quotations omitted). Pursuant to Rule 9(b), plaintiffs must plead specific facts showing

15

that defendant entered into the agreement with the intention to not be bound by the contract. Defendants

16

argue that plaintiffs’ complaint fails to make such a showing.

Seventh Cause of Action, Promissory Fraud

17

The complaint incorporates paragraphs 43 through 47 in support of the contention that Ward

18

never intended to be bound by the agreement. The complaint alleges that Ward was aware of the fact

19

that Seawind faced company-ending liability due to the work-related death of an employee, and this is

20

circumstantial evidence that he never intended to be bound by his agreement. Compl. ¶ 43. Plaintiffs

21

also point to the fact that Seawind declared bankruptcy four months after the inquest into the employee’s

22

death was completed, which they argue is circumstantial evidence that Ward knew Seawind faced

23

company-ending liability at the time he entered the agreement. Id. ¶ 46. Also, plaintiffs point to the fact

24

that Seawind did not even begin construction on plaintiffs’ yacht until the deadline for completion,

25

which is circumstantial evidence showing that Ward had no intention of completing the yacht by the due

26

date. Id. ¶ 44. In addition, plaintiffs allege that, shortly after they signed the agreement with Seawind

27

Catamarans Pty Ltd, Ward “repudiated” his obligation to be bound by the contract, “stating that Seawind

28

Group Holdings Pty Ltd would now be the entity acquiring the Corsair Group of Companies.” Id. ¶ 45.
10

1

The quick repudiation is circumstantial evidence that Ward never intended to be bound by the

2

agreement. Finally, plaintiffs allege that Seawind did not maintain adequate capitalization to cover its

3

liabilities to plaintiffs, which is further circumstantial evidence that Ward did not intend to honor the

4

agreement.

5
6

Therefore, the Court finds that plaintiffs have sufficiently pled enough facts to make a claim for
promissory fraud that is plausible on its face.

7
F.

9

Plaintiffs allege that Koch breached the implied covenant of good faith and fair dealing. Compl.

10
United States District Court
For the Northern District of California

8

¶ 126. Under California law, all contracts contain an implied covenant of good faith and fair dealing.

11

Egan v. Mutual of Omaha Insurance Company, 24 Cal. 3d 809, 818 (1979). This covenant “requires

12

each contracting party to refrain from doing anything to injure the right of the other to receive the

13

benefits of the agreement.” Id.

Eighth Cause of Action, Good Faith and Fair Dealing

14

Defendants argue that the complaint does not sufficiently allege the actions that Koch took which

15

violated the implied covenant. However, the complaint alleges that Koch violated the covenant because

16

he “engaged in conduct that is frustrating [plaintiffs’] rights to the benefits of the Sales Contract; to wit,

17

by and through the use of various corporate entities, and non-existent entities, Mr. Koch has been able

18

to avoid liability for breach of the Sales Contract.” Compl. ¶ 126. This is sufficient to state a cause of

19

action for a violation of the implied covenant of good faith and fair dealing.

20

Plaintiffs also allege that Ward breached the implied covenant of good faith and fair dealing by

21

frustrating plaintiffs’ rights under the Mareva Agreement. Id. ¶ 127. “Although an action for bad faith

22

breach of the covenant of good faith and fair dealing sounds in tort, the duty of good faith and fair

23

dealing derives from and exists solely because of the contractual relationship between the parties.”

24

Austero v. National Cas. Co. of Detroit, Mich., 62 Cal. App. 3d 511, 515 (1976). Thus, for this action

25

to stand, the Court must be able to hear the contract claim. However, as explained supra, any cause of

26

action pursuant to the Mareva Agreement must be brought before an arbitrator. Thus, the eighth cause

27

of action cannot lie against Ward under the Mareva Agreement in this Court.

28

Accordingly, the eighth cause of action is DISMISSED WITH LEAVE TO AMEND.
11

1
2
3

CONCLUSION
For the foregoing reasons, defendants’ motion to dismiss is DENIED IN PART and GRANTED
IN PART. Docket No. 15.

4
5

IT IS SO ORDERED.

6
7

Dated: August 29, 2013

SUSAN ILLSTON
United States District Judge

8
9
United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
12