Misle v. Schnitzer Steel Industries, Inc. et al

Filing 76

ORDER GRANTING 59 Motion for Summary Adjudication. Signed by Judge Jeffrey S. White on February 19, 2017. (jswlc3, COURT STAFF) (Filed on 2/19/2017)

1
2
3
4

NOT FOR CITATION

5

UNITED STATES DISTRICT COURT

6

NORTHERN DISTRICT OF CALIFORNIA

7
8

Plaintiff,

9

ORDER GRANTING DEFENDANT’S
MOTION FOR SUMMARY
ADJUDICATION

v.

10
11
United States District Court
Northern District of California

Case No. 15-cv-06031-JSW

HOWARD MISLE,

SCHNITZER STEEL INDUSTRIES, INC.,

Re: Dkt. No. 59

Defendant.

12
13
14

Now before the Court for consideration is the motion for summary adjudication filed by

15

Defendant Schnitzer Steel Industries, Inc. (“SSI”). The Court has considered the parties’ papers,

16

relevant legal authority, the record in this case, and it has had the benefit of oral argument. For the

17

reasons set forth in this Order, the Court GRANTS SSI’s motion.

18

BACKGROUND

19

It is undisputed that Plaintiff, Howard Misle (“Misle”), other entities not parties to this

20

lawsuit, and SSI entered into an Asset Purchase Agreement (the “APA”) dated April 6, 2011.1 It

21

also is undisputed that the transaction closed on April 21, 2011 (the “Closing Date”). Pursuant to

22

the APA, SSI agreed, for a sum certain, to purchase “all of the assets of the Selling Parties used or

23

held for use in, relating to or arising out of the Business2, subject to the exclusions and on the

24
1

25
26
27

The other entities are American Metal Group, Inc., American Metal & Iron, Inc., AMI
Recycling, Inc., AMI Recycling Drive-Thru, Inc., Dimond Metal Recycling, Inc., A-1
International Recycling Consultants, Inc., Metal Brokers Recycling, Inc., L&M Auto Dismantling,
Company, Inc., and HNM Properties, Inc. These entities are referred to throughout the APA as
the “Selling Parties.” Misle is referred to as the “Selling Party Representative.”

2

28

“Business” is defined as the Selling Parties’ “business of collecting, processing,
transporting and selling ferrous and non-ferrous scrap metal, glass, plastics and cardboard and

1

terms set forth” in the APA.3 (Dkt. No. 63-1, Declaration of Howard Misle in Opposition to

2

Defendant’s Motion for Summary Adjudication (“Misle Opp. Decl.”), ¶ 4, Ex. A, APA, Recitals, ¶

3

C.)4
The parties agreed that a portion of the total purchase price, $5,500,000.00 (the “Escrow

4
5

Funds” or “Escrow Amount”), would be placed in escrow and held by Wells Fargo Bank, N.A. as

6

escrow agent.5 (Dkt. 59-2, Declaration of James Denzer in Support of Defendant’s Motion for

7

Summary Judgment (“Denzer Decl.”), ¶ 3, Ex. 1, APA, Art. IV, § 4.2(c).) The APA states that the

8

Escrow Funds are “to serve as a source of indemnification for the matters addressed in Article IX

9

and to be held and released under the terms of the Escrow Agreement.” (Id.)

10

Pursuant to the terms of the Escrow Agreement and this Agreement,
the Escrow Amount will be divided into two parts as follows: (i)
$4,500,000 of the Escrow Amount will be used for indemnification
matters addressed in Section 9.2, with $2,250,000 of such portion of
the Escrow Amount (less any paid or pending claims) to be
disbursed to the Selling Parties on the first anniversary of the
Closing Date and the remaining balance of such portion of the
Escrow Amount to be disbursed to the Selling Parties on the second
anniversary of the Closing Date (less any paid or pending claims);
and (ii) $1,000,000 of the Escrow Amount will be used for
indemnification matters addressed in Section 9.7 and held until the
fifth anniversary of the Closing Date[.]6

United States District Court
Northern District of California

11
12
13
14
15
16
17

(Id.)
The APA also states that “[a]ny Party seeking indemnification shall promptly notify the

18
19

Party obligated to provide indemnification hereunder of any Loss or Losses, claim or breach,

20
21
22

other aspects of metals recycling and other materials recycling.” (Misle Opp. Decl., APA,
Recitals, ¶ A.)
3

23

The total purchase price is not material to this motion.

4

24
25
26

SSI objected to certain portions of the Misle Declaration, which relate to his interpretation
of a settlement agreement between the parties. (Dkt. No. 66-1.) The Court overrules the
objections on the basis that SSI has not demonstrated that the statements are inadmissible. The
Court does not, however, accept as true Misle’s characterization of the terms of the settlement
agreement.

5

27

The APA refers to the $5,500,000.00 as the “Escrow Amount.” The Court shall use that
term when it is quoting from the APA. Otherwise, it shall use the term “Escrow Funds.”

28

6

There are other provisos set forth in Section 4.2(c), which are not at issue in this lawsuit.
2

1

including any claim by a third party, that might give rise to indemnification hereunder, and the

2

Indemnified Party shall deliver to the Indemnifying Party a … Claim Certificate.” (Denzler Decl.,

3

Ex. 1, APA, Art. IX, § 9.5(a)).)

4
5
6
7
8
9
10

United States District Court
Northern District of California

11
12
13

If the Indemnifying Party objects to the indemnification of an
Indemnified Party in respect of any claim or claims specified in any
Claim Certificate, the Indemnifying Party shall deliver a written
notice to such effect to the Indemnified Party within 30 days after
receipt by the Indemnifying Party of such Claim Certificate.
Thereafter the Indemnifying Party and the Indemnified Party shall
attempt in good faith to agree upon the rights of the respective
parties within 30 days of receipt of such Claim Certificate with
respect to each of such claims to which the Indemnifying Party has
objected. If the Indemnified Party and the Indemnifying Party agree
with respect to any of such claims, the Indemnified Party and the
Indemnifying Party shall promptly prepare and sign a memorandum
setting forth such agreement and, if applicable an instruction to the
Escrow Agent. Should the Indemnified Party and the Indemnifying
Party fail to agree as to any particular item or items or amount or
amounts, then the Indemnified Party shall be entitled to pursue its
available remedies for resolving its claim for indemnification.
(Id., APA, Art. IX, § 9.5(a)(ii).)

14

Misle and SSI executed the Escrow Agreement on April 20, 2011. (Dkt. No. 59-3,

15

Request for Judicial Notice, Ex. 1, Wells Fargo Bank N.A. v. American Metal Group., Inc., 16-cv-

16

3614-JSW, Complaint, Ex. 1, Escrow Agreement.) The Escrow Agreement contains provisions

17

that set forth the procedures for disbursement of the Escrow Funds. (Id., Escrow Agreement, Art.

18

I, § 1.3(d)-(f).) The parties agreed that disbursements could be made by joint or unilateral

19

instructions. (Id., Escrow Agreement, Art. I, § 1.3(a).)

20
21
22
23
24
25
26
27
28

In the event the Escrow Agent receives Unilateral Instructions and a
related Proof of Notice from the Buyer, the Escrow Agent shall pay
the Escrow [Funds] to the account or accounts described in such
Unilateral Instructions on the thirtieth day after receipt of such
Unilateral Instructions, unless, before the thirtieth day after the date
of receipt of such Unilateral Instructions, the Escrow Agent has
received a Notice of Dispute and a related Proof of Notice from
Misle. In the event the Escrow Agent receives such a Notice of
Dispute, the Escrow Agent shall not pay the amount described in
such Unilateral Instructions, but shall proceed as set forth in Section
3.5.
(Id., Escrow Agreement, Art. I, § 1.3(c).)
In December 2014, SSI sent Misle a Claim Certificate and served Unilateral Instructions
on Wells Fargo seeking indemnification in the amount of $86,604.60 (“December Claim”). (Dkt.
3

1

No. 59-1, Declaration of Thomas Woods (“Woods Decl.”), ¶ 3, Ex. A.) It is undisputed that Misle

2

did not serve a Notice of Dispute on Wells Fargo. As a result, Wells Fargo distributed those funds

3

to SSI. Misle contends that when SSI submitted the December Claim, which Misle argues lacks

4

merit, accepted the funds from Wells Fargo, and subsequently refused to return the funds to Misle,

5

it converted those funds. (See Compl. ¶¶ 25-27.) SSI moves for summary adjudication of this

6

claim.
The Court will address additional facts as necessary in its analysis.

7

ANALYSIS

8
9
10

A.

Legal Standards Applicable to Motion for Summary Adjudication.
“A party may move for summary judgment, identifying each claim or defense … on which

United States District Court
Northern District of California

11

summary judgment is sought.” Fed. R. Civ. P. 56(a). A principal purpose of the summary

12

judgment procedure is to identify and dispose of factually unsupported claims. Celotex Corp. v.

13

Catrett, 477 U.S. 317, 323-24 (1986). Summary judgment, or partial summary judgment, is

14

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

15

is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “In considering a motion for

16

summary judgment, the court may not weigh the evidence or make credibility determinations, and

17

is required to draw all inferences in a light most favorable to the non-moving party.” Freeman v.

18

Arpaio, 125 F.3d 732, 735 (9th Cir. 1997), abrogated on other grounds by Shakur v. Schriro, 514

19

F.3d 878, 884-85 (9th Cir. 2008).

20

The party moving for summary judgment bears the initial burden of identifying those

21

portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue

22

of material fact. Celotex, 477 U.S. at 323; see also Fed. R. Civ. P. 56(c). An issue of fact is

23

“genuine” only if there is sufficient evidence for a reasonable fact finder to find for the non-

24

moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A fact is “material”

25

if it may affect the outcome of the case. Id. at 248. If the party moving for summary judgment

26

does not have the ultimate burden of persuasion at trial, that party must produce evidence which

27

either negates an essential element of the non-moving party’s claims or that party must show that

28

the non-moving party does not have enough evidence of an essential element to carry its ultimate
4

1

burden of persuasion at trial. Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102

2

(9th Cir. 2000).
Once the moving party meets its initial burden, the non-moving party must “identify with

3
4

reasonable particularity the evidence that precludes summary judgment.” Keenan v. Allan, 91

5

F.3d 1275, 1279 (9th Cir. 1996) (quoting Richards v. Combined Ins. Co., 55 F.3d 247, 251 (7th

6

Cir. 1995). It is not the Court’s task “to scour the record in search of a genuine issue of triable

7

fact.” Id.; see also Fed. R. Civ. P. 56(c)(3) (“The court need consider only the cited materials, but

8

it may consider other materials in the record.”). If the non-moving party fails to point to evidence

9

precluding summary judgment, the moving party is entitled to judgment as a matter of law.
Celotex, 477 U.S. at 323.

11
United States District Court
Northern District of California

10

B.

The Court Grants SSI’s Motion for Summary Adjudication of the Conversion Claim.
There are three essential elements to Misle’s claim for conversion, only two of which are at

12
13

issue in this motion.7 First, Misle must establish his ownership or right to possession of the

14

disputed funds. See Kremen v. Cohen, 337 F.3d 1024, 1029 (9th Cir. 2003); Hartford Financial

15

Corp. v. Burns, 96 Cal. App. 3d 591, 598 (1979). The “‘mere contractual right of payment,

16

without more, will not suffice’ to support a claim for conversion.” Rutherford Holdings, LLC v.

17

Plaza Del Rey, 223 Cal. App. 4th 221, 233 (2014) (quoting Farmers Ins. Exchange v. Zerin, 53

18

Cal. App. 4th 445, 452 (1997)). The second element requires Misle to establish that SSI converted

19

the disputed funds by a wrongful act or disposition of his property rights. Hartford, 96 Cal. App.,

20

3d at 599 (“conversion is any act of dominion wrongfully exerted over another’s personal property

21

in denial of or inconsistent with his rights therein”) (internal quotations and citations omitted).

22

Because the Court concludes that Misle cannot establish the second element, the Court shall

23

assume for the sake of argument he had a right to possess the funds that are the subject of the

24

December Claim.
In general, “‘[c]onduct amounting to a breach of contract becomes tortious only when it

25
26

also violates a duty independent of the contract arising from principles of tort law.’” Erlich v.

27
7

28

The third element is damages. SSI does not argue that Misle cannot prove this element of
the claim.
5

1

Menezes, 21 Cal. 4th 543, 551 (1999) (quoting Applied Equipment Corp. v. Litton Saudi Arabia

2

Ltd., 7 Cal. 4th 503, 515 (1994)).8 Thus, “outside the insurance context, ‘a tortious breach of

3

contract … may be found when (1) the breach is accompanied by a traditional common law tort,

4

such as fraud or conversion; (2) the means used to breach the contract are tortious, involving

5

deceit or undue coercion or; (3) one party intentionally breaches the contract intending or knowing

6

that such a breach will cause severe unmitigable harm in the form of mental anguish, personal

7

hardship, or substantial consequential damages.’” Id. at 553-54 (quoting Freeman & Mills, Inc. v.

8

Belcher Oil Co., 11 Cal. 4th 85, 105 (1995) (Mosk, J. concurring, in part, and dissenting in part).

9

In Erlich, the Supreme Court provided a number of examples of when tort damages had been
permitted in contract cases. Erlich, 7 Cal. 4th at 551-52. The Erlich court stated that “in each of

11
United States District Court
Northern District of California

10

these cases, the duty that gives rise to tort liability is either completely independent of the contract

12

or arises from conduct which is both intentional and intended to harm.” Id. at 552 (emphasis

13

added).
In his Complaint, Misle alleges the December Claim is “without merit and … improperly

14
15

sought funds Defendant SSI was not entitled to under the APA.” (Compl. ¶ 25.) The same

16

allegations support Misle’s breach of contract claim. (Id. ¶ 14.) Misle also argues that the items

17

for which SSI sought indemnification in the December Claim are not permitted under the APA.

18

That is a dispute about the meaning of the APA’s terms and is no more than an assertion that SSI

19

breached the contract when it submitted the claim. The Court concludes, as a matter of law, that

20

conduct does not violate a duty that is independent of the contractual duties to which the parties

21

agreed and cannot support a claim for conversion.
In a notice of additional authorities, Misle cited Robinson Helicopter, Inc. v. Dana Corp.,

22
23

34 Cal. 4th 979 (2004). In that case, the Supreme Court addressed the issue of whether the

24

economic loss rule would bar “claims for intentional misrepresentation of fraud in the

25

performance of a contract.” 34 Cal. 4th at 984. The plaintiff manufactured helicopters and

26

contracted with the defendant to manufacture and supply it with a particular part, of which

27
8

28

When the Court cited Erlich in its Notice of Questions, it inadvertently omitted a portion
of that quotation. (See Dkt. No. 72, Notice of Questions, Question 3.)
6

1

defendant was the sole manufacturer. Id. at 985. The plaintiff was required by the Federal

2

Aviation Administration (“FAA”) to obtain a “type certificate,” and “[e]very aircraft made

3

pursuant to the certificate must be produced exactly in accordance with that certificate.” Id.

4

Although the defendant originally manufactured the part in accordance with the plaintiff’s

5

specifications, at one stage it changed its manufacturing process. That change deviated from the

6

type certificate’s requirements, and the defendant failed to advise the plaintiff of that fact. Instead,

7

it submitted certificates stating that the part had been “manufactured in conformance with

8

[plaintiff’s] written specifications.” Id. at 985-86.
The parts that deviated from the original specifications began to fail, and the plaintiff was

9

required by the FAA and the FAA’s British equivalent to recall and replace them. Id. at 986. The

11
United States District Court
Northern District of California

10

plaintiff submitted its orders to the defendant and asked that the cost of the replacement parts be

12

determined at a later date. The defendant disputed any liability and refused to provide plaintiff

13

with any replacement parts without payment. Because the defendant was the only manufacturer of

14

the part, plaintiff had no choice but to comply. Id. The plaintiff sued defendant for, inter alia,

15

claims for breach of contract and intentional misrepresentation, prevailed at trial on those claims,

16

and was awarded compensatory and punitive damages. On appeal, the court held that because the

17

plaintiff’s loss was economic, it could not recover in tort and overturned the award of punitive

18

damages. The Supreme Court reversed.

19

It reasoned the defendant engaged in conduct that was “separate from the breach” of

20

contract, i.e., the provision of non-conforming goods. Specifically, when the defendant submitted

21

“false certificates of conformance, [it] unquestionably made affirmative representations that

22

[plaintiff] justifiably relied on to its detriment. But for [defendant’s] affirmative representations,

23

[plaintiff] would not have accepted delivery and used the nonconforming [part] over the course of

24

several years….” Id. at 990-91. In sum, the defendant engaged in “fraud … a tort independent” of

25

the defendant’s breach of contract, and the economic loss rule did not bar recovery on the claims

26

for fraud and misrepresentation. Id.9

27
9

28

The Robinson Helicopter court found it significant that the defendant made “intentional
and affirmative misrepresentations that risked physical harm to persons,” because it was “vital to
7

This argument is raised, albeit briefly, in Misle’s opposition, in that he argues “SSI

1
2

knowingly sought more than the benefit of its bargain under the APA,” which amounted to “a

3

wrongful act.” (Dkt. No. 63, Opp. Br. at 8:2-3.) At the hearing, Misle elaborated on this

4

argument and asserted that SSI knew the December Claim was false and submitted it anyway.

5

According to Misle that conduct would be independently wrongful and would give rise to tort

6

liability in this case. The Court finds, however, that Misle has failed to put forth any evidence

7

from which a reasonable jury could find that SSI engaged in fraudulent or deceptive conduct.

8

One aspect of the December Claim relates to indemnification for soil contamination.

9

Misle submits excerpts of a deposition that suggests SSI may not have supervised the collection of
the soil sample, did not know the source of the sample, and did not know whether the soil had

11
United States District Court
Northern District of California

10

been contaminated before the closing date of the APA. (Dkt. No. 63-2, Declaration of Donnelly

12

Gillen, ¶ 4, Ex. A, Excerpts of Deposition of Scott Sloan (“Sloan Depo.”) at 55:1-56:9, 57:25-

13

58:3.) If one accepts Misle’s interpretation of the APA, what is lacking from these excerpts is any

14

suggestion that, for example, SSI had facts to suggest that the soil had, in fact, been contaminated

15

before the closing date or that the soil came from some other property. Thus, Misle has not met

16

his burden to show a there material facts in dispute about whether SSI acted deliberately and with

17

knowledge the facts set forth in the December Claim were untrue.

18

The Court finds the same is true with respect to Misle’s arguments regarding that aspect of

19

the December Claim that addresses the underground storage tank. Similarly, the Court finds Misle

20

has not met his burden to show there are material facts in dispute as to whether SSI allegedly

21

breached the terms of the APA with the intention or knowledge that it would cause Misle “severe

22

unmitigable harm in the form … substantial consequential damages.’” Erlich, 7 Cal. 4th at 553-54

23

(quoting Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal. 4th 85, 105 (1995) (Mosk, J.

24

concurring, in part, and dissenting in part).10 In sum, the Court concludes Misle has not

25
26
27

the safe performance of the aircraft” that the part function properly. Id. at 991 n.7; see also id. (
“the certificate requirement is part of an integrated regulatory scheme intended to ensure [the
part’s] safe operation”).
10

28

The Court also notes that the Robinson Helicopter court emphasized that its holding was
“narrow in scope and limited to a defendant’s affirmative representations on which a plaintiff
8

1
2
3
4
5
6
7

dem
monstrated that SSI brea
t
ached any du
uties outside of the partie contractu obligations.
es’
ual
Accord
dingly, GRAN SSI’s motion for su
NTS
m
ummary adju
udication, an concludes it is
nd
s
ent
titled to judg
gment in its favor on Mis
f
sle’s claim f conversio 11
for
on.
IT IS SO ORDER
S
RED.
Da
ated: Februar 19, 2017
ry
___
__________
___________
__________
________
JEF
FFREY S. W
WHITE
Un
nited States D
District Judg
ge

8
9
10

United States District Court
Northern District of California

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

reli and whic expose a plaintiff to li
ies
ch
p
iability for p
personal dam
mages indepe
endent of the plaintiff’s
e
eco
onomic loss.” Robinson Helicopter, 34 Cal. 4th at 993 (emp
phasis added There are no such
d).
e
fac before the Court in th case.
cts
e
his
11
The Co expresse no opinion on whether SSI’s claim for indemn
ourt
es
n
r
m
nity, as set fo in the
orth
De
ecember Clai comported with or violated the te
im,
erms of the A
APA.
9