Mansha Consulting LLC v.Alakai et al
Filing
57
ORDER GRANTING DEFENDANT TOM MATSUDA'S MOTION TO DISMISS FIRST AMENDED COMPLAINT FILED MARCH 17, 2017, DEFENDANT CLIFF ALAKAI'S PRE-ANSWER MOTION TO DISMISS FIRST AMENDED COMPLAINT FILED ON MARCH 17, 2017, AND DEFENDANT JEFFREY KISSEL' S SUBSTANTIVE JOINDER TO DEFENDANT MATSUDA'S AND DEFENDANT ALAKAI'S MOTIONS TO DISMISS FIRST AMENDED COMPLAINT FILED ON MARCH 17, 2017 re 37 Motion to Dismiss; re 40 Motion to Dismiss for Failure to State a Claim; re [41 ] Motion for Joinder. Signed by JUDGE ALAN C. KAY on 08/23/2017. The Court GRANTS Defendant Tom Matsuda's Motion to Dismiss First Amended Complaint Filed March 17, 2017 (ECF No. 37 ), Defendant Cliff Alakai' s Pre-Answer Motion to Dismiss First Amended Complaint Filed on March 17, 2017 (ECF No. 40 ), and Defendant Jeffrey Kissel's Substantive Joinder to Defendant Tom Matsuda's Motion to Dismiss First Amended Complaint Filed March 17, 2017 and to Defendant Cliff Alakai's Pre-Answer Motion to Dismiss the First Amended Complaint Filed on March 17, 2017 (ECF No. 41 ). The Court dismisses all counts in the First Amended Complaint WITH PREJUDICE, and Plaintiff's First Amended Complai nt is hereby DISMISSED. (eps, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF).
FILED IN THE
UNITED STATES DISTRICT COURT
DISTRICT OF HAWAII
Aug 23, 2017
SUE BEITIA, CLERK
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
MANSHA CONSULTING LLC,
Plaintiff,
vs.
CLIFF ALAKAI, et al.,
Defendants.
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)
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)
) Civ. No. 16-00582 ACK-RLP
)
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ORDER GRANTING DEFENDANT TOM MATSUDA’S MOTION TO DISMISS FIRST
AMENDED COMPLAINT FILED MARCH 17, 2017, DEFENDANT CLIFF ALAKAI’S
PRE-ANSWER MOTION TO DISMISS FIRST AMENDED COMPLAINT FILED ON
MARCH 17, 2017, AND DEFENDANT JEFFREY KISSEL’S SUBSTANTIVE
JOINDER TO DEFENDANT MATSUDA’S AND DEFENDANT ALAKAI’S MOTIONS TO
DISMISS FIRST AMENDED COMPLAINT FILED ON MARCH 17, 2017
For the reasons set forth below, the Court GRANTS
Defendant Tom Matsuda’s Motion to Dismiss First Amended
Complaint Filed March 17, 2017 (ECF No. 37), Defendant Cliff
Alakai’s Pre-Answer Motion to Dismiss First Amended Complaint
Filed on March 17, 2017 (ECF No. 40), and Defendant Jeffrey
Kissel’s Substantive Joinder to Defendant Tom Matsuda’s Motion
to Dismiss First Amended Complaint Filed March 17, 2017 and to
Defendant Cliff Alakai’s Pre-Answer Motion to Dismiss the First
Amended Complaint Filed on March 17, 2017 (ECF No. 41).
The
Court dismisses all counts in the First Amended Complaint WITH
PREJUDICE, and Plaintiff’s First Amended Complaint is hereby
DISMISSED.
FACTUAL BACKGROUND
In 2010, the Affordable Care Act (“ACA”) required
states to establish health exchanges to facilitate, for
individuals and entities, the selection, purchase, and
enrollment in private health insurance plans.
Complaint (“FAC”) ¶ 11, ECF No. 36.
First Amended
As a result, the State of
Hawaii established the Hawaii Health Connector (“HHC” or the
“Connector”), the State’s health insurance exchange.
Id. ¶ 12.
To assist with its obligations, and in particular, to implement
necessary information technology programs and systems, HHC
retained Plaintiff Mansha Consulting, LLC (“Mansha” or
“Plaintiff”).
Id. ¶¶ 10, 14, 15.
Mansha entered into a contract with HHC (the “IPMO
Contract”) which totaled over 21 million dollars.
Id. ¶ 15.
The IPMO Contract was funded through grants from the federal
government, and accordingly, payment to Mansha was to be
supplied by the Centers for Medicare and Medicaid Services
(“CMS”), the responsible federal agency.
Id. ¶ 16.
Mansha began work under the IPMO contract on or around
April 2013.
Id. ¶ 17.
Beginning with the invoice dated
September 1, 2014 and thereafter, HHC failed to forward Mansha’s
invoices for payment.
Id. ¶ 18.
Following several months of
unpaid invoices, each of which was in the amount of $677,842.61
plus excise taxes, Mansha on or around December of 2014, ceased
2
further work under the IPMO Contract.
Id. ¶ 19.
From July 2014
to December 2014, Mansha continued its work under the contract
based on statements and acts by the Defendants, who were
directors and/or officers of HHC, that payment would be made to
Mansha based on its invoices and erroneous reasons for nonpayment.
Id. ¶¶ 5-7, 19.
Eventually, HHC collapsed.
Id. ¶ 20.
Since HHC’s
collapse, Mansha has attempted to recover its losses by
demanding compensation from HHC directly, retaining Counsel to
address the matter with HHC, contacting CMS directly, and
communicating with other relevant third parties.
Id.
In relation to Defendants’ actions in mishandling the
invoice payments, Mansha alleges negligent misrepresentation,
negligence, and breach of fiduciary duty claims against
Defendants Tom Matsuda (“Matsuda”) and Jeffrey Kissel (“Kissel”)
and a breach of fiduciary duty claim against Defendant Cliff
Alakai (“Alakai”).
Id. ¶¶ 22, 27, 32.
As a result of these
actions, Mansha claims, inter alia, that its value as a company
has been diminished, a pending acquisition of Mansha was
derailed, and that it has lost millions of dollars.
Id. ¶¶ 25,
30, 42.
The FAC contains the following allegations against
each of the Defendants.
Plaintiff only alleges a claim for breach of fiduciary
3
duty against Defendant Alakai.
Id. ¶ 32.
Defendant Alakai was
a member of the Board of Directors for HHC during the relevant
time period and at some point might have served as a treasurer
for the Board of Directors.1
Id. ¶ 33.2
Alakai knew or should
have known that HHC became insolvent and had a duty to Mansha
to, inter alia, avoid any actions that unduly risked assets
which could be used to pay Mansha’s claim.
Id. ¶¶ 39-40.
Mansha alleges that Alakai refused to forward Mansha’s invoices
1
The Court notes that it is uncommon for a corporation’s
board of directors to have a treasurer. A corporation generally
has an officer who is a treasurer.
2
Mansha also alleges that Defendants “received some degree
of compensation for their respective roles within the
Connector.” FAC ¶ 36. Defendant Alakai attaches a declaration
and exhibit with his Motion to show that this allegation is
false.
Federal Rule of Civil Procedure (“Rule”) 12(d) governs the
Court’s consideration of matters outside the pleadings submitted
on a motion to dismiss for failure to state a claim. This Rule
provides, “If, on a motion under Rule 12(b)(6) . . . matters
outside the pleadings are presented to and not excluded by the
court, the motion must be treated as one for summary judgment
under Rule 56. All parties must be given a reasonable
opportunity to present all the material that is pertinent to the
motion.” Fed. R. Civ. P. 12(d). “The court’s decision whether
to consider ‘matters outside the pleadings’—that is, materials
beyond those incorporated into or attached to the pleadings or
of which the court may take judicial notice—is a discretionary
one.” Shugart v. GYPSY Official No. 251715, its Engines, Mach.,
Appurtenances, No. 2:14-CV-1923RSM, 2015 WL 1965375, at *1-2
(W.D. Wash. May 1, 2015).
The Court declines to consider Alakai’s Declaration and the
attached exhibit because Alakai expressly does not seek relief
based on these documents and, as discussed herein, the Court
grants Alakai’s Motion without reference to them. See Alakai
Motion at 3 n.1 (ECF No. 40). Accordingly, the Court accepts
all well-pleaded factual allegations in the FAC as true.
4
for payment by CMS.
Id. ¶ 40.
Mansha alleges that because of
this conduct Alakai was grossly negligent in carrying out his
fiduciary duties to Mansha and breached his fiduciary duty to
Mansha.
Id. ¶¶ 41-42.
Plaintiff alleges negligent misrepresentation,
negligence, and breach of fiduciary duty claims against
Defendant Matsuda.
Id. ¶¶ 22, 27, 32.
Defendant Matsuda was
the Interim Executive Director of HHC “from a date unknown”
until approximately October 2014.
Id. ¶ 23a.
responsible for HHC’s overall administration.
Matsuda was
Id. ¶ 23b.
As the basis for Plaintiff’s negligent
misrepresentation claim, Mansha alleges that Matsuda negligently
misinformed Mansha that the invoices were not being forwarded to
CMS because there was a restriction on funds initiated by either
CMS or HHC.
Id. ¶¶ 23d-e.
Mansha later learned that although
such a restriction may have existed for a short period of time,
the restrictions had been cleared and its invoices could have
been paid.
Id. ¶ 23e.
Matsuda also made erroneous assurances
to Mansha that it would be paid on its submitted invoices, in
effect urging Mansha to “hang in there.”
Id. ¶ 23f.
As a
result of this misinformation, Mansha forwent action which it
otherwise would have taken and which could have prevented damage
to Mansha.
Id. ¶ 23g.
Plaintiff further alleges that the duty
owed by Matsuda to Mansha is imposed by Restatement (Second) of
5
Torts § 552 to exercise reasonable care in obtaining or
communicating information for the guidance of others in their
business transactions.
Id. ¶ 23j.
As the basis for its negligence claim against Matsuda,
Plaintiff alleges that Matsuda owed Mansha a duty to take
reasonable steps to prevent damage to Mansha which could
foreseeably result from these negligent misrepresentations.
¶¶ 28h-i.
Id.
Because Matsuda failed to take any such action, he
breached his duty to Mansha.
Id.
For its breach of fiduciary
duty claim against Matsuda, Plaintiff makes the same allegations
as it does against Defendant Alakai.
Id. ¶¶ 39-42.
Plaintiff alleges negligent misrepresentation,
negligence, and breach of fiduciary duty claims against
Defendant Kissel.
Id. ¶¶ 22, 27, 32.
Defendant Kissel was
HHC’s Executive Director starting in October 2014 and was
responsible for HHC’s overall administration.
Id. ¶¶ 24a-b.
Plaintiff’s claims against Kissel are substantially the same as
Plaintiff’s claims against Matsuda.
See id. ¶¶ 24b-k, 29b-i,
39-42.
PROCEDURAL BACKGROUND
Plaintiff filed a Complaint against Defendants on
October 28, 2016.
ECF No. 1.
The Complaint raised claims for
negligence and negligent breach of fiduciary duty against all
6
Defendants.3
Id.
On December 5, 2016, Matsuda filed a Motion to
Dismiss Complaint Filed October 28, 2016.
filed its Opposition on December 30, 2016.
ECF No. 12.
Mansha
ECF No. 19.
Alakai
and Kissel filed a Non-Substantive Joinder to Matsuda’s Motion
to Dismiss on December 30, 2016.
Reply on January 20, 2017.
ECF No. 21.
ECF No. 26.
Matsuda filed a
On December 30, 2016,
Alakai and Kissel also filed a Pre-Answer Motion to Dismiss
Complaint Filed on October 28, 2016.
ECF No. 20.
filed its Opposition on January 13, 2017.
Plaintiff
ECF No. 25.
and Kissel filed a Reply on January 20, 2017.
Alakai
ECF Nos. 27-28.
On January 20, 2017 Matsuda filed a Non-Substantive Joinder to
Defendants Alakai and Kissel’s Reply.
ECF No. 29.
The Court
held a hearing on both motions to dismiss on February 2, 2017.
On February 16, 2017, the Court entered an Order granting
Defendants’ motions to dismiss the Complaint without prejudice
(“February 16, 2017 Order”).
ECF No. 34.
On March 17, 2017, Plaintiff filed its First Amended
Complaint, alleging claims for negligent misrepresentation,
negligence, and breach of fiduciary duty.
ECF No. 36.
As
previously discussed, Plaintiff alleges all of these claims
against Defendants Matsuda and Kissel but only breach of
3
The Complaint also raised claims against Defendants Eric
Alborg and Diane Reich. ECF No. 1. The FAC does not allege
claims against them. ECF No. 36.
7
fiduciary duty against Defendant Alakai.
Id.
On March 31, 2017, Defendant Matusda filed a Motion to
Dismiss First Amended Complaint Filed March 17, 2017 (“Matsuda
Motion”).
ECF No. 37.
On April 6, 2017, Defendant Alakai filed
a Pre-Answer Motion to Dismiss First Amended Complaint Filed on
March 17, 2017 (“Alakai Motion”).
ECF No. 40.
On that same
date, Defendant Kissel filed a Substantive Joinder to Defendant
Matsuda’s Motion to Dismiss First Amended Complaint Filed March
17, 2017 and to Defendant Cliff Alakai’s Pre-Answer Motion to
Dismiss First Amended Complaint Filed on March 17, 2017 (“Kissel
Joinder”).
ECF No. 41.
On July 13, 2017, Plaintiff filed oppositions to
Defendants’ Motions and Kissel’s Joinder (“Pl. Alakai Opp.” and
“Pl. Matusda Opp.”).
ECF Nos. 45, 46.
On July 20, 2017,
Defendants Matsuda and Alakai filed replies (“Matsuda Reply” and
“Alakai Reply”) to Plaintiff’s oppositions.
ECF Nos. 48, 50.
Defendant Kissel also filed a reply in further support of his
Joinder (“Kissel Reply”).
ECF No. 49.
The Court held a hearing
on these Motions on August 3, 2017.4
4
On August 8, 2017, Plaintiff filed a Non-Hearing Motion
for Leave to File Statement of Clarification of Response at Oral
Argument. ECF No. 54. On that same date, Defendant Matsuda
filed an Opposition to Plaintiff’s Motion. ECF No. 55. On
August 10, 2017, the Court issued a minute order denying
Plaintiff’s Motion for Leave to File Statement of Clarification
of Response at Oral Argument. ECF No. 56.
8
STANDARD
Federal Rule of Civil Procedure 12(b)(6) authorizes
the Court to dismiss a complaint that fails “to state a claim
upon which relief can be granted.”
Fed. R. Civ. P. 12(b)(6).
Rule 12(b)(6) is read in conjunction with Rule 8(a), which
requires only “a short and plain statement of the claim showing
that the pleader is entitled to relief.”
8(a)(2).
Fed. R. Civ. P.
The Court may dismiss a complaint either because it
lacks a cognizable legal theory or because it lacks sufficient
factual allegations to support a cognizable legal theory.
Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.
1988).
In resolving a Rule 12(b)(6) motion, the Court must
construe the complaint in the light most favorable to the
plaintiff and accept all well-pleaded factual allegations as
true.
Sateriale v. R.J. Reynolds Tobacco Co., 697 F.3d 777, 783
(9th Cir. 2012).
The complaint “must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)).
“The plausibility standard . . . asks for more than a
sheer possibility that a defendant has acted unlawfully.”
Id.
“Where a complaint pleads facts that are ‘merely consistent
with’ a defendant’s liability, it ‘stops short of the line
9
between possibility and plausibility of entitlement to relief.’”
Id. (quoting Twombly, 550 U.S. at 557).
When the Court dismisses a complaint pursuant to Rule
12(b)(6) it should grant leave to amend unless the pleading
cannot be cured by new factual allegations.
OSU Student All. v.
Ray, 699 F.3d 1053, 1079 (9th Cir. 2012).
DISCUSSION
I.
Count I: Negligent Misrepresentation
a. Whether Mansha’s Negligent Misrepresentation Claim Must
Be Dismissed Pursuant to the Court’s February 16, 2017
Order
Defendants Matsuda and Kissel argue that Mansha’s
negligent misrepresentation claim must be dismissed pursuant to
the law of the case.
The Court’s February 16, 2017 Order held:
[T]he allegations in the Complaint involve
duties owed by Defendants to HHC or duties
that—if the Defendants had at all—arose from
the contract between HHC and Mansha.
. . .
Moreover, the negligent conduct alleged
invokes duties that would only arise from
the contract between HHC and Mansha. Mansha
essentially claims that . . . Defendants
Matsuda and Kissel negligently misinformed
Mansha about the reasons for delay and the
status of the payments, leading to
additional damages. See Compl. ¶¶ 26-28.
These allegations involve HHC’s alleged
failure to perform on the contract, i.e.,
its failure to pay Mansha for its work.
They do not involve violations of any duty
independently recognized by Hawaii tort law.
See Francis, 971 P.2d at 708. As in
10
Bernstein, Mansha has “failed to establish
any cognizable duty under [Hawaii] law apart
from and independent of [HHC’s] contractual
promises.” 827 F.2d at 482; see also
Kelomar, 413 Fed. Appx. at 982-83 (“A person
may not ordinarily recover in tort for the
breach of duties that merely restate
contractual obligations.” (quoting Aas v.
Superior Court, 12 P.3d 1125, 1135 (Cal.
2000)).
February 16, 2017 Order at 14-16.
In addition, the Court’s
February 16, 2017 Order specifically held that affirmative
representations that Mansha would be paid did not give rise to a
tort claim:
Mansha attempts to argue that its
allegations that Defendants . . . made
affirmative representations that Mansha
would be paid involved a duty independent
from the contract between Mansha and HHC.
However, this claim attempts to “turn[] a
promise to perform into a statement of fact
so that failure to perform automatically
shows a misrepresentation of intention to
perform.” Catamount Radiology, P.C. v.
Bailey, No. 1:14-CV-213, 2015 WL 3795028, at
*14 (D. Vt. June 18, 2015) (quoting Howard
v. Usiak, 775 A.2d 909, 913 (Vt. 2001)). As
noted by the Vermont Supreme Court in Howard
v. Usiak, if such a promise to perform were
actionable in tort, “any breach of contract
would be misrepresentation so that negligent
breach would be a tort.” 775 A.2d at 913.
The court in Howard recognized “the need to
keep tort and contract theories separate so
that negligence concepts do not overrun the
limitations on contractual rights and
remedies.” Id. The same concerns were
outlined by the Hawaii Supreme Court in
Francis, and are applicable here.
11
February 16, 2017 Order at 17.5
The FAC’s allegations in the negligent
misrepresentation claim are substantively the same as those in
the original complaint’s negligence claim.
The only major
difference between these claims is that Mansha alleges that the
duty owed by Defendants to Mansha is imposed by Restatement
(Second) of Torts § 552 to exercise reasonable care or
competence in obtaining or communicating information for the
guidance of others in their business transactions.
FAC ¶¶ 23j,
24j (citing State of Hawaii ex rel. Bronster v. U.S. Steel
Corp., 82 Haw. 32, 41, 919 P.2d 294, 303 (1996)).6
Therefore,
pursuant to the law of the case, which held that the conduct
alleged invokes duties that would only arise from the contract
between HHC and Mansha, Count I of the FAC must be dismissed
because it fails to allege any additional conduct that would
give rise to an independent duty in tort.
5
The Court notes that the affirmative representations that
Mansha would be paid are not the only misrepresentations that
Mansha alleges in its FAC. The FAC also alleges that Defendants
negligently misinformed Mansha about the cause of the payment
delays, stating that Mansha’s invoices were not being forwarded
to CMS for payment due to a restriction on funds initiated by
either CMS or the Connector. FAC ¶¶ 23d-e, 24d-e. However, as
previously mentioned, this allegation was in Mansha’s original
complaint, which the Court’s February 16, 2017 Order found did
not give rise to a cognizable tort claim.
6
The FAC also added allegations regarding damages resulting
from the alleged negligent misrepresentations. See FAC ¶¶ 25ad.
12
The Court finds no basis to depart from the law of the
case on this issue.
Under the law of the case doctrine, “a
court is generally precluded from reconsidering an issue that
has already been decided by the same court, or a higher court in
the identical case.”
Cir. 1993).
Thomas v. Bible, 983 F.2d 152, 154 (9th
A court may have discretion to depart from
the law of the case where: (1) the first decision was clearly
erroneous; (2) an intervening change in the law has occurred;
(3) the evidence on remand is substantially different; (4) other
changed circumstances exist; or (5) a manifest injustice would
otherwise result.
(9th Cir. 1997).
United States v. Alexander, 106 F.3d 874, 876
Failure to apply the doctrine of the law of
the case absent one of the requisite conditions constitutes an
abuse of discretion.
Thomas, 983 F.2d at 155.
Throughout its opposition, Mansha argues that this
case gives rise to independent tort duties rather than contract
duties.
Specifically, Mansha argues that at the time of the
alleged negligent misrepresentations HHC was in breach of the
contract and any work Mansha continued to perform was extracontractual because Mansha was no longer obligated to perform
due to the contract breach.
26.
See Pl. Matsuda Opp. at 18-20, 25-
The Court finds this argument problematic for several
reasons.
First, despite Mansha’s argument that it was not
performing under the contract after HHC’s breach, Mansha’s FAC
13
alleges just the opposite—“MANSHA only continued work under the
IPMO contract as a direct result of various negligent
misrepresentations by Defendants.”
FAC ¶ 18 (emphasis added);
see also id. ¶ 19 (“MANSHA continued to work under the IPMO
Contract based on reasonable reliance upon various negligent
statements and acts by Defendants . . .”).
The FAC, therefore,
alleges that Mansha continued to work under the contract and not
that its work was extra-contractual.
Second, Mansha’s FAC only alleges that Mansha was
“faced with a seeming breach by the Connector” but fails to
allege that HHC in fact breached the contract and that Mansha
was no longer obligated to perform under it.
Id. ¶ 23h.
Third,
Mansha’s argument assumes that a breach by a party to a contract
necessarily cancels the contract.
However, a breach by a party
to a contract does not always cancel the contract.
See 23
Williston on Contracts § 63:3 (4th ed.); 17A Am. Jur. 2d
Contracts § 549.
Generally, if the breach is material, the non-
breaching party may have grounds to cancel the contract.
id.
See
If, on the other hand, the breach is partial, the non-
breaching party’s remedy is for damages, and the non-breaching
party is still bound by the contract and may not abandon
performance.
See id.
Mansha has failed to allege that there
was a breach that would serve as a basis for cancelling the
contract.
As previously discussed, Mansha’s FAC does not allege
14
that the contract was breached let alone cancelled.
Accordingly, the Court finds no basis to depart from the law of
the case and dismisses Count I with prejudice.
b. Whether the Economic Loss Rule Bars Mansha’s Negligent
Misrepresentation Claim
The Court also finds that the economic loss rule bars
Mansha’s negligent misrepresentation claim.
Hawaii recognizes
the economic loss rule, which precludes recovery in tort for
purely economic damages.
Commerce & Indus. Ins. Co. v. Watts
Water Techs., Inc., No. 15-00324 HG-KJM, 2016 WL 6471247, at *4
(D. Haw. Oct. 31, 2016).
It “marks the fundamental boundary
between the law of contracts, which is designed to enforce
expectations created by agreement, and the law of torts, which
is designed to protect citizens and their property by imposing a
duty of reasonable care on others.”
Leis Family Ltd. P’ship v.
Silversword Eng’g, 126 Haw. 532, 535, 273 P.3d 1218, 1221 (Haw.
Ct. App. 2012) (internal quotation marks and citation omitted).
These tort standards are imposed by society, without regard to
any agreement.
The doctrine “was designed to prevent
disproportionate liability and allow parties to allocate risk by
contract.”
Id. (internal quotation marks and citation omitted).
“Hawai‘i law will not allow tort recovery in the absence of
conduct that (1) violates a duty that is independently
recognized by principles of tort law and (2) transcends the
15
breach of the contract.”
Francis v. Lee Enters., Inc., 89 Haw.
234, 235, 971 P.2d 707, 708 (1999).
In Maui Elec. Co. v. Chromalloy Gas Turbine, LLC, No.
CIV. 12-00486 SOM, 2015 WL 1442961, at *12-16 (D. Haw. Mar. 27,
2015), the court analyzed Hawaii case law on whether the
economic loss rule bars a claim for negligent misrepresentation.
The court held, “As this court reads those cases, the
contractually based negligent misrepresentation claims are
barred, but [those not based on contractual obligations]
survive.”
Id. at *13; compare State of Hawaii ex rel. Bronster
v. U.S. Steel Corp., 82 Haw. 32, 40, 919 P.2d 294, 302 (1996)
(holding that the tort of negligent misrepresentation was not
precluded by the economic loss doctrine), with City Exp., Inc.
v. Express Partners, 87 Haw. 466, 469-70, 959 P.2d 836, 839-40
(1998) (distinguishing U.S. Steel and holding that in the
context of construction litigation a tort action for negligent
misrepresentation alleging damages purely based on economic loss
is not available to a party in privity of contract with a design
professional).7
The Court finds this analysis persuasive, especially
7
In City Exp., the Hawaii Supreme Court differentiated U.S.
Steel, emphasizing that “the issue of whether contractual
privity would prevent the application of section 552 was not
presented. No contract existed between the steel manufacturer
and the State of Hawai‘i.” 87 Hawaii at 469, 959 P.2d at 839.
16
in light of the previously discussed Hawaii rule that tort
recovery is not allowed in the absence of conduct that violates
a duty that is independently recognized by tort law and
transcends the breach of the contract.8
As previously discussed
and pursuant to the February 16, 2017 Order, the alleged
misrepresentations here are contract-based because they relate
to whether HHC was able to perform under its contract with
Mansha.
The allegations here do not relate to
misrepresentations outside of the contract and do not transcend
a breach of contract action.
The damages alleged also do not
relate to any specific harm arising from the alleged
misrepresentations that would not also exist from a breach of
contract claim.
Again, Mansha argues that because Defendants in this
case already breached the contract at the time of the negligent
misrepresentation, the duty that Defendants owed to Mansha was
extra-contractual.
Pl. Matsuda Opp. at 25.
8
For the reasons
This view is also consistent with the Ninth Circuit’s
reading of the case law regarding the economic loss doctrine.
Plaintiff discusses Giles v. Gen. Motors Acceptance Corp., 494
F.3d 865, 875-79 (9th Cir. 2007), where the court addressed
whether the economic loss rule barred fraud and conversion
claims under Nevada law. In addressing this issue, the Ninth
Circuit noted that courts have applied the economic loss rule to
bar recovery on tort claims beyond negligence and strict
liability where the claims have “amounted to nothing more than a
failure to perform a promise contained in a contract.” Id. at
876. In such cases, the plaintiff has been entitled only to
ordinary contract damages. Id.
17
previously discussed, the Court does not find this argument
persuasive.
Accordingly, the Court also dismisses Count I
because it is barred by the economic loss rule.9
II.
Count II: Negligence
a. Whether Mansha Pleads a Cognizable Negligence Claim
Defendants Matsuda and Kissel also move to dismiss
Count II (Negligence) of the FAC pursuant to the Court’s
February 16, 2017 Order, which dismissed Mansha’s negligence
claim because it failed to allege that Defendants owed Mansha a
cognizable duty recognized by Hawaii tort law apart from and
independent of HHC’s contractual promises.
Defendants Matsuda
and Kissel argue that Mansha’s FAC fails to overcome the defects
that were fatal to this claim as originally pled.
The Court
agrees.
Mansha’s amended negligence claim is substantively the
same as the negligence claim alleged in its original complaint.10
9
Defendants also move to dismiss Count I because Mansha
fails to allege the necessary elements to establish a claim for
negligent misrepresentation. The Court declines to address this
argument because it has already dismissed Count I on the basis
that it does not allege an independent tort claim. The injury
that Mansha alleges is based in contract law not tort law and
therefore Mansha cannot allege a plausible negligent
misrepresentation claim.
10
In its opposition, Mansha states that it alleges
additional allegations. However, the new allegation it
discusses was in its original complaint. Compare FAC ¶ 23(d)
(“Instead, Defendant MATSUDA negligently misinformed MANSHA
about the causes for the delay, and also about the status of
(continued . . . )
18
The only substantive difference is that Mansha deleted its
allegation that Defendants owed Mansha “a duty to take
reasonable care in carrying out [their] responsibilities, to
protect MANSHA against foreseeable risks,” which the February
16, 2017 Order held was conclusory and insufficient to withstand
a motion to dismiss.
Order at 16.
Compl. ¶¶ 27g, 28g; February 16, 2017
In place of that allegation, Mansha has now
alleged the following:
MATSUDA knew or should have known that those
statements were false, that MANSHA would
rely on them, and that the negligent
statements created a heightened risk of harm
to MANSHA.
Accordingly, after making these negligent
misrepresentations and thus creating a
foreseeable risk of harm, Defendant MATSUDA
owed MANSHA a duty to take steps to prevent
damage to MANSHA which could foreseeably
result from those negligent
misrepresentations.
FAC ¶¶ 28g-h (emphasis in original); see also id. ¶¶ 29g-h
(alleging the same as to Defendant Kissel).11
However, these
allegations do not cure the issue the Court previously
( . . . continued)
payments to MANSHA.”), with Compl. ¶ 27(d)(same). However, as
previously discussed, the Court already concluded that such
conduct did not involve violations of any duty independently
recognized by Hawaii tort law, see February 16, 2017 Order at
16, and the Court finds no basis to depart from the law of the
case.
11
The Court also notes that the FAC included additional
allegations regarding damages resulting from the alleged
negligence. See FAC ¶¶ 30a-d.
19
recognized in its February 16, 2017 Order—whether Defendants
owed Mansha a cognizable duty independently recognized by Hawaii
tort law apart from and independent of HHC’s contractual
promises.
Mansha argues in its opposition that its FAC
establishes that Defendants owed a duty under its negligence
cause of action.
Mansha discusses Ah Mook Sang v. Clark, 130
Haw. 282, 308 P.3d 911 (2013) for the proposition that a duty
exists for an individual who unreasonably created a heightened
risk of harm through their affirmative actions to minimize the
risk of that harm.
Pl. Matsuda Opp. at 5-7.
Mansha discusses
the various factors delineated in Ah Mook Sang to determine
whether a tort duty exists.
However, the Court’s February 16,
2017 Order already distinguished Ah Mook Sang from the present
case because, inter alia: (1) it involved the risk of physical
injury; (2) it emphasized that the duty at issue related to
preventing physical harm from occurring and the physical harm at
issue was death; and (3) defendant had a special relationship
with plaintiff who was an invitee on his property.
16, 2017 Order at 19-21.
See February
None of these facts exist in the FAC.
Apart from this argument, all of the legal arguments
Mansha makes in its opposition are related to its negligent
misrepresentation count rather than its pure negligence count.
In sum, Mansha has failed to support its claim that Defendants
20
Matsuda and Kissel owed Mansha a duty under tort law to prevent
economic injury.
Mansha has not cited to any authority
recognizing that a duty would exist under similar circumstances.
Thus, the FAC fails to plead sufficient allegations to show a
duty, independently recognized by tort law, to support its
negligence claim.
Accordingly, the Court grants Defendants
Matsuda and Kissel’s motion to dismiss Count II with prejudice.
b. Whether Plaintiff’s Negligence Claim is Barred by the
Economic Loss Rule
Defendants Matsuda and Kissel also argue that the
Court should dismiss Plaintiff’s negligence count because it is
barred by the economic loss rule.
In response, Plaintiff argues
that the economic loss doctrine does not bar claims of negligent
misrepresentation.
However, Plaintiff does not clearly make an
argument specific to its separate negligence claim.
As previously discussed, the economic loss rule
precludes recovery in tort for purely economic damages.
Commerce & Indus. Ins. Co. v. Watts Water Techs., Inc., No. 1500324 HG-KJM, 2016 WL 6471247, at *4 (D. Haw. Oct. 31, 2016).
“Hawai‘i law will not allow tort recovery in the absence of
conduct that (1) violates a duty that is independently
recognized by principles of tort law and (2) transcends the
breach of the contract.”
Francis v. Lee Enters., Inc., 89 Haw.
234, 235, 971 P.2d 707, 708 (1999).
21
“[N]egligence claims—
specifically, those based on violations of contract
specifications—fall within the purview of the economic loss
rule.”
Ass’n of Apartment Owners of Newtown Meadows ex rel. its
Bd. of Directors v. Venture 15, Inc., 115 Haw. 232, 292-93, 167
P.3d 225, 285-86 (2007), as corrected on denial of
reconsideration (Sept. 20, 2007) (emphasis in original).
As previously discussed, Plaintiff has failed to
plausibly allege that Defendants Matsuda and Kissel owed a duty
to Mansha that is independently recognized by principles of tort
law and transcends any claim for breach of contract.
Rather,
Plaintiff’s negligence claim is based on contract violations.
Therefore, the Court finds that the economic loss doctrine bars
Plaintiff’s negligence claim.
Accordingly, the Court grants
Defendants Matsuda and Kissel’s motion to dismiss Count II of
the FAC and dismisses Count II with prejudice.
III. Count III: Breach of Fiduciary Duty
a. Breach of Fiduciary Duty Claim Against Defendant Alakai
i.
Whether Defendant Alakai Owed a Fiduciary Duty to
Mansha
1. Whether the Trust Fund Doctrine Applies to the
Conduct Alleged in the FAC
Defendant Alakai argues that the breach of fiduciary
duty claim against him should be dismissed because he did not
owe a fiduciary duty to Mansha under the trust fund doctrine.
Mansha asserts that the trust fund doctrine, followed in Hawaii,
22
serves as a basis for fiduciary duties to attach to the
Defendants.
The trust fund doctrine imposes certain fiduciary
duties on a corporation’s directors when the corporation becomes
insolvent.
The theory underlying the doctrine is that when this
occurs the assets of a corporation “exist for the benefit of all
of its creditors and that thereafter no liens or rights can be
created either voluntarily or by operation of law whereby one
creditor is given an advantage over others.”
15A William Meade
Fletcher, Fletcher Cyclopedia of the Law of Private Corporations
§ 7369 (rev. vol. 2009).
The assets at issue “may consist of
property in the possession of the corporation, accounts
receivable . . . claims of various kinds . . . [and] payments
made to creditors in preference of the rights of other
creditors. . .”
Id.
Under the trust fund doctrine,
“[c]reditors may . . . look to the personal assets of the
directors for breaching their fiduciary duty in improperly
distributing the assets of the corporation.”
Id.
Very few cases in Hawaii have involved the trust fund
doctrine and most of these cases are over a hundred years old.
See, e.g., Hemenway v. Honolulu Clay Co., 18 Haw. 187 (Haw.
Terr. 1907); Troy Laundry Mach. Co. v. Sanitary Steam Laundry
23
Co., 18 Haw. 388 (Haw. Terr. 1907); California Feed Co. v. Club
Stables Co., 10 Haw. 209 (Haw. Rep. 1896).12
12
As indicated, the Court is only aware of three cases
applying the trust fund doctrine in Hawaii and there have been
no Hawaii decisions discussing the doctrine for over a hundred
years, except for In re Ellis, 487 P.2d 286, 288-89 (Haw. 1971).
In re Ellis involved the dissolution of a for-profit
corporation, where pursuant to Haw. Rev. Stat. § 416-123 the
corporation’s directors became trustees for the creditors and
stockholders by operation of law. In turn, as noted by the
Hawaii Supreme Court, Haw. Rev. Stat. § 416-124 governed the
duties and liabilities of the trustees, providing:
The title to all assets and property, real,
personal, and mixed belonging to the
corporation shall, immediately upon the
dissolution thereof . . . vest in the
trustee or trustees for the creditors and
stockholders or members of the corporation
dissolved.
Under the name of the trustee or trustees .
. . the trustee or trustees shall have
power: to sue for and collect the debts,
claims, and demands due to the corporation,
or compound and settle any claims as they
may deem best; to have, hold, reserve, sell,
and dispose of property, real, personal, and
mixed; to adjust and pay all debts of the
corporation dissolved; . . . to exercise all
powers of the dissolved corporation; . . .
to divide among the stockholders . . .
moneys and other properties that remain
after paying the debts and necessary
expenses; and they shall be jointly and
severally liable to the creditors and to the
stockholders . . . to the extent of the
corporation property which shall come into
their hands.
Id. at 288.
The court pointed out that statutes:
(continued . . . )
24
The Supreme Court of the Republic of Hawaii recognized
this doctrine, noting that:
when . . . a corporation is hopelessly
insolvent and unable to carry out objects
for which it is created, the directors must
be regarded as trustees of the property for
the benefit of the creditors and
stockholders, and it is then their duty to
wind up the affairs of the corporation for
the benefit of all concerned[.]
California Feed Co., 10 Haw. at 212; see also Hemenway, 18 Haw.
at 189 (stating that the “trust fund theory” “is that the
capital stock of a corporation, and especially its unpaid
portion, is a trust fund for the benefit of creditors”).
Defendants argue that the trust fund doctrine under
Hawaii law only prohibits self-dealing, for example by directors
( . . . continued)
such as ours here in Hawaii, HRS § 416-123,
treat the existence of the corporation as
terminated upon dissolution but nonetheless
allow suits to be brought or continued.
These statutes resulted from a demand by
stockholders and creditors for equitable
relief and embodied the ‘trust fund theory’
by authorizing the directors at the time of
dissolution to serve as trustees.
Id. at 289.
The Court notes that the Hawaii statutes discussed in In re
Ellis, which have since been repealed and codified in a
different form, applied specifically in the context of
dissolution and made no reference to insolvency. The
legislative history of these statutes in In re Ellis does not
make any reference to the trust fund doctrine to show that they
were enacted to replace the trust fund doctrine under Hawaii
common law.
25
preferring themselves over other creditors, and does not
prohibit other types of conduct.13
Although the Court will not
go so far as to hold that the trust fund doctrine in Hawaii
requires self-dealing, the Court agrees with Defendants that the
conduct alleged here is insufficient for the trust fund doctrine
to apply under Hawaii law.
The trust fund doctrine in Hawaii has only been
applied to conduct involving self-dealing.
Troy Laundry Mach.
Co. v. Sanitary Steam Laundry Co., 18 Haw. 388 (Haw. Terr. 1907)
involved allegations that a corporation’s director engaged in
self-dealing and discussed cases in other jurisdictions
involving similar conduct.
Hemenway v. Honolulu Clay Co., 18
Haw. 187 (Haw. Terr. 1907) examined the trust fund doctrine
where stockholders of an insolvent corporation allegedly
received shares in excess of what they paid.
See 18 Haw. at
188.
Similarly, the cases Defendants mention from outside
Hawaii have typically applied the trust fund doctrine in the
context of self-dealing.
In re Kallmeyer, 242 B.R. 492, 496
(B.A.P. 9th Cir. 1999), discussing Oregon law, states that
pursuant to the trust fund doctrine, the corporation’s directors
13
Defendants Matsuda and Kissel make the same argument.
The Court addresses the arguments made by Defendants Matsuda and
Kissel on this issue in this section.
26
hold its assets in trust for equal distribution among its
creditors and cannot use those assets to prefer themselves as
creditors to the prejudice of general creditors.
“[A] director
who breaches this fiduciary duty by misappropriating corporate
assets for personal gain will be held liable under the trust
fund doctrine.”
Id.
In re: Shoe Pavilion Inc, No. 1:08-AP-
01534-MT, 2013 WL 12114073 (Bankr. C.D. Cal. Feb. 21, 2013),
report and recommendation adopted sub nom., In re: Shoe
Pavilion, Inc., No. 1:08-AP-01534, 2013 WL 12113232 (C.D. Cal.
May 30, 2013) discusses California law on the trust fund
doctrine and states:
“Recovery for breaching the fiduciary duties
imposed under the trust-fund doctrine in
California generally pertains to cases where
the directors or officers of an insolvent
corporation have diverted assets of the
corporation for the benefit of insiders or
preferred creditors.” While no California
cases “expressly limited the fiduciary duty
under the trust fund doctrine to the
prohibition of self-dealing or the
preferential treatment of creditors, the
scope of the trust fund doctrine in
California is reasonably limited to cases
where directors or officers have diverted,
dissipated, or unduly risked the insolvent
corporation’s assets.” “In other words, the
doctrine is not applied to create a duty
owed by directors to creditors solely due to
a state of corporate insolvency.
Application of the doctrine requires, in
addition, that directors have engaged in
conduct that diverted, dissipated, or unduly
risked corporate assets that might otherwise
have been used to satisfy creditors’
claims.”
27
Id. (quoting Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.
App. 4th 1020, 1040-41, 100 Cal. Rptr. 3d 875, 893 (2009))
(internal citations omitted).
California courts have typically
found violations of the trust fund doctrine only in situations
where there was self-dealing by directors or preferential
treatment of creditors, and the “most frequently cited cases
interpreting California’s trust fund doctrine . . . involve acts
that fall into one or both of these categories.”
Peter M.
Gilhuly & Ted A. Dillman, Corporate Fiduciary Liability to
Creditors and Interested/Director Transactions: Two Key
Distinctions Between California and Delaware Fiduciary Duty Law
That Come Under Scrutiny During Insolvency, 31 Cal. Bankr. J.
827, 830 (2012); see also id. at 831 (“While the Berg court’s
language suggests that any ‘preferential treatment of creditors’
of an insolvent corporation is prohibited by the trust fund
doctrine, almost all of the leading cases finding trust fund
doctrine violations involve preferential payment to insider
creditors.” (emphasis in original)).
Moreover, other jurisdictions have expressly limited
the trust fund doctrine to circumstances involving self-dealing.
See, e.g., Bank of Am. v. Musselman, 222 F. Supp. 2d 792, 798-99
(E.D. Va. 2002) (applying Virginia law and stating “because the
trust fund doctrine does not operate in the absence of self-
28
dealing, it is of no avail to plaintiffs here as there are no
allegations that Hacker engaged in self-dealing acts to divert
ECS assets from plaintiffs’ reach”); St. James Capital Corp. v.
Pallet Recycling Assocs. of N. Am., Inc., 589 N.W.2d 511, 517
(Minn. Ct. App. 1999) (“Absent self-dealings to the detriment of
other creditors, the directors and officers of a corporation,
once it becomes insolvent, are not transformed into a trust
relationship and do not owe a legal duty to liquidate corporate
assets in such a way as to minimize losses incurred by the
corporation’s creditors.”).
Mansha alleges that despite notifications from Mansha,
“Defendants failed to investigate and take reasonable action to
effect proper forwarding and payment of MANSHA’s invoices by CMS
. . . Instead, Defendants neglected and refused to forward
MANSHA’s invoices for payment by CMS, thereby squandering,
dissipating, and unduly risking an asset that could have been
used to pay MANSHA,” HHC’s creditor.
FAC ¶ 40.
The Court finds that this conduct alone is
insufficient to give rise to the trust fund doctrine under
Hawaii law.
Hawaii case law has only applied the trust fund
doctrine to cases involving self-dealing.
As discussed herein,
other jurisdictions have expressly limited the trust fund
doctrine to conduct involving self-dealing.
Plaintiff relies on
California law—specifically the previously quoted language from
29
the Berg decision—to support its argument.
However, even
California law, which does not expressly limit the trust fund
doctrine to situations involving self-dealing or the
preferential treatment of creditors, states that the trust fund
doctrine does not create a broad fiduciary duty.
In addition,
as previously discussed, California has typically applied the
trust fund doctrine to situations involving self-dealing or the
preferential treatment of creditors, neither of which Plaintiff
alleges here.
The conduct that Plaintiff asserts seeks to establish
a broader fiduciary duty than the one created under the trust
fund doctrine.
Plaintiff does not claim that Defendants treated
it differently than other creditors or that Defendants preferred
themselves over Mansha.
Accordingly, the Court dismisses this
claim for breach of fiduciary duty under the trust fund doctrine
with prejudice.14
14
The Court notes that the circumstances of this case do
not seem to give rise to the trust fund doctrine for another
reason. Here, the funds at issue were to come from CMS and not
HHC, and it does not appear that HHC had received such funds
from CMS since, as alleged by Mansha (FAC ¶ 40), HHC had not yet
forwarded the invoices to CMS for payment. Therefore, HHC’s
insolvency does not seem to be directly related to whether
Mansha received payment. Because HHC’s insolvency seems to be
immaterial to the injury Mansha suffered, the trust fund
doctrine does not appear to apply under the facts of this case.
30
2. Whether Mansha Must Allege that HHC Had
Determined to Discontinue the Prosecution of
Business for the Trust Fund Doctrine to Apply
Defendant Alakai argues that the FAC must be dismissed
pursuant to the Court’s February 16, 2017 Order because Mansha
has not alleged that HHC determined to discontinue the
prosecution of business.
In a footnote, the February 16, 2017
Order states:
Troy Laundry cites to a Seventh Circuit case
which discussed the trust fund doctrine as
imposing duties on both directors and
officers. Id. at 390 (citing Sutton Mfg.
Co. v. Hutchinson, 63 F. 496 (7th Cir.
1894)). In Sutton, however, the court
described the duty of directors and officers
as being triggered “when a private
corporation is dissolved or becomes
insolvent, and determines to discontinue the
prosecution of business.” 63 F. at 501
(emphasis added); see also id. at 502
(same). Here, the Complaint does not allege
that HHC “determin[ed] to discontinue the
prosecution of business” at the time
Defendants knew or should have known of
HHC’s insolvency. See id.
February 16, 2017 Order at 25 n.4.
Accordingly, under the
Court’s prior holding, the trust fund doctrine does not apply
unless the corporation is dissolved or becomes insolvent and
determines to discontinue the prosecution of its business.
The Court finds no reason to depart from the law of
the case as to this issue.
In Sutton, which was quoted by the
Hawaii case Troy Laundry, the court emphasized throughout its
opinion that the trust fund doctrine did not apply unless the
31
corporation determines to discontinue the prosecution of
business.
The court held:
when [a corporation] becomes insolvent, and
has no purpose of continuing business, the
power to sell, dispose of, and transfer its
estate is not altogether without limitation
. . .
It is, we think, the result of the cases
that when a private corporation is dissolved
or becomes insolvent, and determines to
discontinue the prosecution of business, its
property is thereafter affected by an
equitable lien or trust for the benefit of
creditors.
. . .
In our judgment, when a corporation becomes
insolvent and intends not to prosecute its
business, or does not expect to make further
effort to accomplish the objects of its
creation, its managing officers or directors
come under a duty to distribute its property
or its proceeds ratably among all creditors,
having regard of course to valid liens or
charges previously placed upon it.
63 F. at 500-03 (emphasis added)(internal quotation marks and
citation omitted).
Plaintiff argues that the law of the case should not
apply because Sutton mentioned the cessation of business only
because it was relevant in the case and did not hold that the
determination to discontinue business was a necessary element
for the trust fund doctrine to apply.
Pl. Alakai Opp. at 12.
Given the clear and consistent language in Sutton, however, the
32
Court disagrees.
In addition, the cases Plaintiff discusses,
which are quoted in Sutton, do not impact the Court’s
interpretation of Sutton.
In addition, other jurisdictions have found that the
trust fund doctrine does not apply when a corporation is
insolvent but still operating.
See, e.g., Aurelius Capital
Master, Ltd. v. Acosta, No. 3:13-CV-1173-P, 2014 WL 10505127, at
*4 (N.D. Tex. Jan. 28, 2014) (“No Texas cases indicate that the
trust fund doctrine has expanded to apply when a corporation is
insolvent, but still operating.”); In re Kallmeyer, 242 B.R.
492, 496 (B.A.P. 9th Cir. 1999) (“Oregon has adopted the trust
fund doctrine which provides that directors of a corporation owe
its creditors a fiduciary duty if either of the following
occurs: (1) the corporation suspends its business and becomes
insolvent or (2) the corporation’s assets are placed in the
possession of the court and it ceases to be a going concern.”
(citing Gantenbein v. Bowles, 103 Or. 277, 285, 203 P. 614, 617
(1922) (emphasis added)).
Pursuant to the Court’s February 16, 2017 Order,
Mansha’s breach of fiduciary duty claim must have included
allegations that HHC determined to discontinue the prosecution
of business for the trust fund doctrine to apply.
Because the
FAC does not include such allegation, Mansha has failed to
allege a plausible breach of fiduciary duty claim based on the
33
trust fund doctrine.
The Court, therefore, dismisses the breach
of fiduciary duty claim as to Defendant Alakai, and as discussed
herein, as to Defendants Matsuda and Kissel.
3. Whether Haw. Rev. Stat. § 414D-149(e) Modifies
Any Duties Alakai Owed to Mansha under the
Trust Fund Doctrine
Defendant Alakai argues that Haw Rev. Stat. § 414D149(e) modifies any fiduciary duties that he would have under
the trust fund doctrine.15
Haw Rev. Stat. § 414D-149(e), part of
Hawaii’s Nonprofit Corporation’s Act, states: “A director shall
not be deemed to be a trustee with respect to the corporation or
with respect to any property held or administered by the
corporation, including without limit, property that may be
subject to restrictions imposed by the donor or transferor of
the property.”
(emphasis added).
Defendant Alakai argues that
the trust fund doctrine cannot apply to directors of a nonprofit corporation because, pursuant to Haw. Rev. Stat. § 414D149(e), directors of non-profit corporations shall not be deemed
to be trustees with respect to the corporation.
The Court does
not find this argument convincing for the following reasons.
15
As stated in the FAC, the establishment of HHC “was
codified in Hawaii Revised Statutes §§ 435H-1-435H-12.” FAC ¶
12. Pursuant to Haw. Rev. Stat. § 435H-2(a), HHC was
established as a “Hawaii nonprofit corporation organized and
governed pursuant to chapter 414D, the Hawaii nonprofit
corporations act.” Chapter 435H of the Hawaii Revised Statutes,
which created HHC, was repealed in 2016 after HHC ceased
operations. See 2016 Haw. Sess. Laws Act 44, § 3.
34
Most importantly, if the Court were to adopt Defendant
Alakai’s purported reading of the statute, the trust fund
doctrine in Hawaii would be nullified in the context of nonprofit corporations.
The Hawaii Supreme Court has held,
“[S]tatutes which are in derogation of common law must be
strictly construed . . . Where it does not appear there was
legislative purpose in superseding the common law, the common
law will be followed.”
Burns Int’l Sec. Servs., Inc. v. Dep’t
of Transp., 66 Haw. 607, 611, 671 P.2d 446, 449 (1983); see Lee
v. Puamana Cmty. Ass’n, 109 Haw. 561, 575 n. 13, 128 P.3d 874,
888 n. 13 (2006) (“It is well settled that, in the absence of
legislative intent to supersede the common law, such common law
principles apply.”); Watson v. Brown, 67 Haw. 252, 256, 686 P.2d
12, 14 (1984) (stating that “[a] statutory remedy is, as a rule,
merely cumulative and does not abolish an existing common law
remedy unless so declared in express terms or by necessary
implication”); see also United States v. Bestfoods, 524 U.S. 51,
52 (1998) (“[T]o abrogate a common-law principle, a statute must
speak directly to the question addressed by the common law.”).
The plain language of § 414D-149 and its legislative history
reveal no legislative purpose to supersede the trust fund
doctrine as established in Hawaii’s common law.16
16
Critically,
In his Reply, Defendant Alakai argues that the
(continued . . . )
35
the plain language of the statute makes no reference to the
duties directors owe the corporation upon insolvency and the
legislative history does not specifically indicate that the
statute was intended to apply during insolvency.
Therefore, the
Court cannot apply § 414D-149(e) to negate any fiduciary duties
that Defendant Alakai would have under the trust fund doctrine.17
Furthermore, under the trust fund doctrine, directors
are not deemed trustees in the literal sense, which would be
necessary for § 414D-149(e) to apply here.
Rather, the trust
fund doctrine “references a situation analogous to a trust
relationship where fiduciary duties arise . . .”
In re Moeller,
( . . . continued)
legislative history shows that § 414D-149(e) was enacted to
supersede the trust fund doctrine. Defendant Alakai asserts
that Haw. Rev. Stat. 415B-98(c), which has since been repealed
along with the entirety of Chapter 415B and replaced by Chapter
414D, required a director of a dissolved corporation to act as a
trustee for its creditors if a court did not appoint a trustee.
He further asserts that Chapter 414D was introduced to “repeal
Hawaii’s existing nonprofit corporations law and replace it with
a new law based on the most recent version of the Model
Nonprofit Corporations Act and allow mutual benefit societies to
organize as nonprofit corporations under the existing nonprofit
corporations law.” Alakai Reply, Exhibit C at JK000198. The
Court, however, finds that this legislative purpose does not
demonstrate that the Hawaii legislature specifically intended §
414D-149(e) to supersede the trust fund doctrine as established
in Hawaii’s common law.
17
The Court notes that this holding creates tension with
and supersedes the Court’s February 16, 2017 Order, which
applied § 414D-149(f) (in addition to other reasons) to dismiss
the breach of fiduciary duty claim in the original complaint as
to Defendant Alakai. However, for the reasons discussed herein,
which do not relate to Chapter 414D, the Court dismisses the
breach of fiduciary duty count in the FAC.
36
466 B.R. 525, 534 (Bankr. S.D. Cal. 2012); see Troy Laundry, 18
Haw. at 390 (“‘Although such directors and officers are not
technical trustees, they hold, in respect of the property under
their control, a fiduciary relation to creditors . . .’”
(quoting Sutton Mfg. Co., 63 F. at 501)); In re Bonnie Classics,
Inc., 116 F. Supp. 646, 647 (S.D.N.Y. 1953) (“[D]irectors are
not trustees in the strict, technical sense of the term, but are
considered in equity as bearing a fiduciary relation to the
corporation and its stockholders.”); see also 15A William Meade
Fletcher, Fletcher Cyclopedia of the Law of Private Corporations
§ 7369 (rev. vol. 2009) (“The term trust fund doctrine is a
misnomer to the extent it suggests an express or technical trust
. . . the doctrine’s reference to ‘trust’ . . . references a
situation analogous to a trust relationship where fiduciary
duties arise . . .”).
Accordingly, the Court does not find
Defendant Alakai’s argument regarding § 414D-149(e) convincing
here.
ii.
Whether Mansha’s Breach of Fiduciary Duty Claim
is Procedurally Defective Because it Failed to
Join HHC
Defendant Alakai argues that “under modern law, a
creditor may only bring an action under the trust fund doctrine
derivatively, and must name the corporation and/or its receiver
in the action.”
Alakai Motion at 15.
necessary party in a derivative suit.
37
A corporation is a
See Meyer v. Fleming, 327
U.S. 161, 170 (1946).
Alakai discusses the landmark case of N. Am. Catholic
Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del.
2007), which altered the landscape of the trust fund doctrine
under Delaware law.
See Quadrant Structured Prod. Co., Ltd. v.
Vertin, 115 A.3d 535, 544 (Del. Ch. 2015) (stating that
Gheewalla “significantly altered the landscape for evaluating a
creditor’s breach-of-fiduciary-duty claim”).
In that case, the
court held that “individual creditors of an insolvent
corporation have no right to assert direct claims for breach of
fiduciary duty against corporate directors.
Creditors may . . .
[bring] derivative claims on behalf of the insolvent corporation
or any other direct nonfiduciary claim . . . that may be
available for individual creditors.”
(emphasis in original).18
Gheewalla, 930 A.2d at 103
The court reasoned that, “creditors
are afforded protection through contractual agreements, fraud
and fraudulent conveyance law, implied covenants of good faith
and fair dealing, bankruptcy law, general commercial law and
other sources of creditor rights.”
Id. at 99.
The court
further held, “Recognizing that directors of an insolvent
corporation owe direct fiduciary duties to creditors. . . [would
18
The Court notes that, as discussed herein, Gheewalla is
distinguishable because, inter alia, Mansha is not asserting a
claim for breach of fiduciary duty on behalf of the corporation
but rather on its own behalf.
38
create] conflict between those directors’ duty to maximize the
value of the insolvent corporation . . . and the . . . direct
fiduciary duty to individual creditors.”
Id. at 103.
Since Gheewalla, courts in Delaware have appeared to
move away from holding that a corporation’s directors have
direct fiduciary duties to creditors, which is a central
principle of the trust fund doctrine.
See Quadrant Structured
Prod. Co. v. Vertin, 102 A.3d 155, 172-76 (Del. Ch. 2014)
(detailing the history of the case law on directors’ fiduciary
duties to creditors when a corporation is insolvent and stating
that Gheewalla established that directors of an insolvent
corporation do not owe fiduciary duties to creditors); CML V,
LLC v. Bax, 6 A.3d 238, 253-54 (Del. Ch. 2010), aff’d, 28 A.3d
1037 (Del. 2011), as corrected (Sept. 6, 2011) (“Today, the
trust fund doctrine has been largely discredited and abandoned,
but its spirit lives on in the post-insolvency corporate
creditor derivative action.”).19
19
The Court notes that the application of the trust fund
doctrine in Delaware was questionable prior to Gheewalla. See
Prod. Res. Group LLC v. NCT Group, Inc., 863 A.2d 772, 791 (Del.
Ch. 2004) (noting that “[a] strand of authority (by no means
universally praised) . . . describes an insolvent corporation as
becoming akin to a trust for the benefit of the creditors”); In
re JTS Corp., 305 B.R. 529, 538 (Bankr. N.D. Cal. 2003)
(“Delaware law has not followed an uncompromising trust fund
doctrine. Although the supreme court has not had an opportunity
to discuss the issue further, the lower courts . . . have
generally turned away from describing directors of an insolvent
(continued . . . )
39
The Delaware Chancery Court has further explained that
before Gheewalla, creditors could enforce the fiduciary duties
that directors owed them through a direct action for breach of
fiduciary duty, and under the trust fund doctrine, the
directors’ fiduciary duties to creditors included an obligation
to manage the corporation as a trust fund for the creditors’
benefit.
Quadrant Structured Prod. Co., Ltd. v. Vertin, 115
A.3d 535, 544-47 (Del. Ch. 2015).
However, this does not remain
true post-Gheewalla.
Under Delaware law, the
Id. at 546.
directors of an insolvent corporation do not owe any particular
duties to creditors but continue to owe fiduciary duties to the
corporation.
Id. at 546-47.
In addition, since Gheewalla,
“[r]egardless of whether a corporation is solvent or insolvent,
creditors cannot bring direct claims for breach of fiduciary
duty.
After a corporation becomes insolvent, creditors gain
standing to assert claims derivatively for breach of fiduciary
duty.”
Id.
Courts in some jurisdictions have adopted the Delaware
rule from Gheewalla.
See, e.g., GoHealth, LLC v. Simpson, No.
13 C 02334, 2013 WL 6183024, at *5 (N.D. Ill. Nov. 26, 2013)
(predicting that the Illinois Supreme Court would follow
( . . . continued)
corporation as guardians of a trust fund for the benefit of
creditors.”).
40
Gheewalla and holding that individual creditors of a corporation
do not have standing to bring a direct breach of fiduciary duty
claim after a corporation’s insolvency); Wells Fargo Bank, N.A.
v. Konover, No. 3:05-CV-1924 (CFD), 2011 WL 1225986, at *16 (D.
Conn. Mar. 28, 2011) (stating that the three Connecticut courts
to address the issue of whether individual creditors can bring a
direct breach of fiduciary duty claim against directors of an
insolvent corporation have adopted the rule in Gheewalla and
holding the same); Sanford v. Waugh & Co., 328 S.W.3d 836, 84647 (Tenn. 2010) (adopting the Delaware Supreme Court’s holding
in Gheewalla and finding that although a creditor did not have a
direct breach of fiduciary duty claim, he could have initiated a
derivative claim on behalf of all of the insolvent corporation’s
creditors).20
20
Defendant Alakai also discusses cases from North Carolina
to support his argument that a derivative claim is required
under the trust fund doctrine. However, the central case Alakai
discusses does not in fact require a derivative claim under the
trust fund doctrine. Rather, Underwood v. Stafford states that
under the trust fund doctrine if “the cause of action were
founded on injuries peculiar or personal to plaintiff himself,
so that any recovery would not pass to the corporation and
indirectly to other creditors, the cause of action could have
been properly asserted by plaintiff.” 270 N.C. 700, 703, 155
S.E.2d 211, 213 (N.C. 1967). However, where the alleged breach
or injuries are based on duties owed to the corporation, and not
to any particular creditor, the creditor must bring a derivative
suit. See id.
The other cases Plaintiff cites follow this rule. See
Angell v. Kelly, 336 F. Supp. 2d 540, 544-45 (M.D.N.C. 2004)
(holding that when all creditors of an insolvent or bankrupt
(continued . . . )
41
Courts in other jurisdictions, however, have not
adopted this rule.
See, e.g., PCS Nitrogen, Inc. v. Ross Dev.
Corp., 126 F. Supp. 3d 611, 629 (D.S.C. 2015), appealed
docketed, No. 16-1546 (4th Cir. May 12, 2016) (“The court
concludes that South Carolina law recognizes a direct cause of
action by a creditor against directors of an insolvent
corporation for breach of fiduciary duties owed that
creditor.”); Koninklijke Philips Elecs. N V v. Nat’l Film Labs.
Inc., No. CV 12-4576 GAF (FFMx), 2014 WL 12581759, at *4 (C.D.
Cal. May 15, 2014) (stating that California case law “expressly
permits non-derivative actions by creditors under the trust fund
( . . . continued)
corporation share an injury based on a common act which was not
unique to plaintiff, only a receiver or trustee, and not the
creditors, has standing to assert the creditors’ collective
claim against directors on behalf of the corporation); Goodwin
v. Whitener, 262 N.C. 582, 583-84, 138 S.E.2d 232, 233-34 (1964)
(holding that the insolvent corporation must be a party to the
case because the duties which have been breached because of the
directors’ mismanagement of the corporation’s affairs were
primarily to the corporation).
Under these cases, Mansha could bring a direct claim so
long as the cause of action was founded on injuries peculiar or
personal to it. Here, the FAC alleges a breach of fiduciary
duty based on particular duties Defendants owed to Mansha and
not HHC in general. Mansha has not alleged a common injury to
all creditors. The injury Mansha alleges is unique to Mansha
and is not primarily an injury to the corporation. The assets
that Mansha alleges Defendants dissipated were only those assets
that could have been used to pay Mansha and were not for the
direct benefit of the corporation or other creditors.
Therefore, contrary to Defendant Alakai’s argument, the Court
finds that these cases support Plaintiff’s position that it can
bring a direct claim here.
42
doctrine”); In re ms55, Inc., 420 B.R. 806, 819-20 (Bankr. D.
Colo. 2009), aff’d, No. 10-CV-00042-PAB, 2011 WL 1084967 (D.
Colo. Mar. 21, 2011) (contrasting Colorado law to Delaware’s
holding in Gheewalla and stating, “Under Colorado law, by
contrast, directors of an insolvent corporation owe
a limited duty to creditors not to favor their own interests at
the expense of creditors” (emphasis in original)).
Under the trust fund doctrine in Hawaii, directors
hold a fiduciary relation to creditors.
Co., 10 Haw. at 212.
See California Feed
In In Re Ellis, in describing the trust
fund doctrine, the Supreme Court of Hawaii noted that “the
‘trust fund theory’ [] authorize[ed] the directors at the time
of dissolution to serve as trustees.”
1971).
487 P.2d 286, 289 (Haw.
The court noted that “[i]n this capacity the former
directors are proper and necessary parties to legal proceedings
aimed at winding up the affairs of the dissolved corporation.”
Id.
If the Court were to require a derivative suit in this
instance, it would be departing from Hawaii’s rule that
directors of an insolvent corporation owe a fiduciary duty to
its creditors and are proper parties in legal proceedings
alleging a breach of that duty.
See California Feed Co., 10
Haw. at 212; Troy Laundry, 18 Haw. at 390.
There has been no indication that the Hawaii Supreme
Court would move away from this rule, which is central to the
43
trust fund doctrine.
Furthermore, as previously discussed,
Delaware’s holding in Gheewalla is not consistently followed in
other jurisdictions.
The Court, therefore, finds that pursuant
to the trust fund doctrine, Mansha can allege a direct claim
against HHC’s directors.
iii. Whether the Breach of Fiduciary Duty Claim
Against Defendant Alakai Must be Dismissed
Because the FAC Does Not Adequately Allege a
Breach
Defendant Alakai argues that the breach of fiduciary
duty allegation against him must be dismissed because it is, at
best, “an unadorned, the defendant-unlawfully-harmed-meaccusation.”
at 555).
Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S.
The FAC alleges that Alakai was a member of HHC’s
board of directors, that he was compensated, and that he was
aware of HHC’s insolvency.
FAC ¶¶ 33, 36, 38.
Mansha then
alleges that Alakai breached his fiduciary duty to Mansha by
“despite multiple notifications from MANSHA . . . fail[ing] to
investigate and take reasonable action to effect proper
forwarding and payment of MANSHA’s invoices by CMS, which
represented valuable assets to the Connector.”
Id. ¶ 40.
Instead, “Defendants neglected and refused to forward MANSHA’s
invoices for payment by CMS, thereby squandering, dissipating,
and unduly risking an asset that could have been used to pay
MANSHA, a creditor to the Connector.”
44
Id. ¶ 41.
In his Reply,21 Alakai argues that Mansha must allege
that Alakai had personal “notice of Mansha’s claims” and must
have had the “authority . . . to investigate or forward Mansha’s
invoices” to state a plausible breach of fiduciary duty claim.
Alakai Reply at 2.
The Court agrees.
Although Mansha alleges
that Defendants received multiple notifications from Mansha (FAC
¶ 40), Mansha does not allege that Alakai, as a director of HHC,
had responsibility for the overall administration of HHC and
control over the proper forwarding and payment of Mansha’s
invoices by CMS.22
For this reason, the Court finds that Mansha
has failed to plausibly allege that Alakai breached his alleged
fiduciary duty to Mansha and dismisses Count III as to Defendant
Alakai on this additional basis.
b. Breach of Fiduciary Duty Claim Against Defendants Matsuda
and Kissel
Defendants Matsuda and Kissel argue that Mansha’s FAC
should be dismissed because they did not owe a fiduciary duty to
21
The Ninth Circuit has held that a “district court need
not consider arguments raised for the first time in a reply
brief.” Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007).
However, a court has discretion to decide whether or not it will
consider such arguments. Lane v. Dep’t of Interior, 523 F.3d
1128, 1140 (9th Cir. 2008) (citing Glenn K. Jackson, Inc. v.
Roe, 273 F.3d 1192, 1201-02 (9th Cir. 2001)).
22
This is contrary to what the FAC alleges as to Defendants
Matsuda and Kissel, who—as officers of HHC—had responsibility
for its overall administration. FAC ¶¶ 23b, 24b.
The Court also notes that, as mentioned herein, CMS was to
provide HHC with payments for it to forward to Mansha.
45
Mansha.
Matsuda and Kissel first argue that the trust fund
doctrine requires self-dealing.
For the reasons previously
discussed in Part III.a.iii.1, the Court holds that the conduct
alleged in the FAC does not fall into the purview of the trust
fund doctrine.
Accordingly, the Court dismisses Count III as to
Defendants Matsuda and Kissel.
Matsuda and Kissel also argue that Count III must be
dismissed pursuant to the Court’s February 16, 2017 Order, which
held that they did not owe a fiduciary duty to Mansha under the
trust fund doctrine because the complaint only referred to them
as officers and not directors of HHC.
Order at 24-26.
See February 16, 2017
Similarly, in the FAC, Mansha has only referred
to Matsuda as HHC’s Interim Executive Director, FAC ¶¶ 23a, 28ac, 34, and Kissel as HHC’s Executive Director.
c, 35.
FAC ¶¶ 24a, 29a-
Matsuda and Kissel therefore are not liable to Mansha
under the trust fund doctrine because they were not directors of
HHC, in addition to the other reasons discussed herein.
Mansha, citing to an excerpt of Troy Laundry, argues
that Hawaii law is clear that the trust fund doctrine applies to
both directors and officers.23
However, Mansha fails to note
23
In making this argument, Mansha implies that the FAC only
alleges that Matsuda and Kissel were officers. In addition,
Mansha states in its opposition, “Defendants Tom Matsuda and
Jeffrey Kissel officers of the Hawaii Health Connector . . .”
Pl. Matsuda Opp. at 1.
(continued . . . )
46
that in the Troy Laundry excerpt it discusses, the Supreme Court
of the Territory of Hawaii was quoting a Seventh Circuit case,
Sutton Mfg. Co. v. Hutchinson, 63 F. 496 (7th Cir. 1894).24
As
previously discussed, the Court’s February 16, 2017 Order
distinguished Sutton from the present case, on the basis that
the complaint did not allege that HHC determined to discontinue
the prosecution of business.
February 16, 2017 Order at 25 n.4.
Given this language in Sutton, the Court elaborates on
its previous order and finds that officers, who have managing
authority of the corporation, may have fiduciary duties under
the trust fund doctrine in certain circumstances, such as where
there has been a determination for the insolvent corporation to
no longer continue business.
However, none of these
circumstances have been alleged here.
For example, as
previously discussed, the FAC does not allege that HHC
“determined to discontinue the prosecution of business” at the
( . . . continued)
The Court notes, however, that the FAC also contains
ambiguous language that Matsuda and Kissel were directors and/or
officers of HHC. FAC ¶ 2. To the extent Matsuda and Kissel can
be construed as directors of HHC, the Court still dismisses the
FAC as to these Defendants pursuant to the Court’s February 16,
2017 Order, which required Mansha to allege that HHC determined
to discontinue the prosecution of business, and the fact that
Mansha has not alleged sufficient conduct to give rise to the
trust fund doctrine under Hawaii law.
24
The Court notes that Troy Laundry appears to be the only
Hawaii case that references the trust fund doctrine as applying
to both directors and officers.
47
time Defendants knew or should have known of HHC’s insolvency.
The FAC, therefore, fails to overcome the same defects that were
fatal to this claim as originally pled.
Accordingly, the Court
dismisses Count III as to Defendants Matsuda and Kissel with
prejudice.25
In sum, the Court dismisses all of Plaintiff’s claims
in the FAC.
Because further amendment is futile, this dismissal
is with prejudice, without leave to amend.26
25
The Court notes that one allegation in Mansha’s complaint
seems to allege that Defendants intentionally withheld Mansha’s
invoices for payment by CMS. See FAC ¶ 40 (“Defendants
neglected and refused to forward MANSHA’s invoices for payment
by CMS . . .” (emphasis added)). The Court, however, does not
interpret the FAC as alleging an intentional claim because the
FAC consistently alleges negligence except for this allegation,
and does not allege sufficient facts to support a claim based on
intentional wrongdoing.
26
The Court notes that granting Plaintiff leave for further
amendment would be futile with respect to the negligent
misrepresentation and negligence claims because of the law of
the case, which held that none of the conduct alleged here gives
rise to a tort duty, and the economic loss rule.
In regard to the breach of fiduciary duty claim, granting
leave for further amendment would be futile as to all Defendants
because none of the conduct Plaintiff alleges gives rise to the
trust fund doctrine and therefore Plaintiff cannot state a
plausible claim that Defendants owed Mansha a fiduciary duty.
However, the Court notes that it also dismisses the FAC on
the following grounds where further amendment might not be
futile: (1) Plaintiff has not alleged that HHC had determined to
discontinue business; and (2) Plaintiff has not adequately
alleged that Alakai breached any alleged fiduciary duties
because Plaintiff has not pled that Alakai had authority over
HHC’s overall administration and the proper forwarding and
payment of Mansha’s invoices by CMS.
48
CONCLUSION
For the foregoing reasons, the Court GRANTS Defendant
Tom Matsuda’s Motion to Dismiss First Amended Complaint Filed
March 17, 2017 (ECF No. 37), Defendant Cliff Alakai’s Pre-Answer
Motion to Dismiss First Amended Complaint Filed on March 17,
2017 (ECF No. 40), and Defendant Jeffrey Kissel’s Substantive
Joinder to Defendant Tom Matsuda’s Motion to Dismiss First
Amended Complaint Filed March 17, 2017 and to Defendant Cliff
Alakai’s Pre-Answer Motion to Dismiss the First Amended
Complaint Filed on March 17, 2017 (ECF No. 41).
The Court
dismisses all counts in the First Amended Complaint WITH
PREJUDICE, and Plaintiff’s First Amended Complaint is hereby
DISMISSED.
The Clerk of Court is DIRECTED to enter judgment in
favor of Defendants and to close this case.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, August 23, 2017.
________________________________
Alan C. Kay
Sr. United States District Judge
Mansha Consulting LLC vs. Cliff Alakai, et al., Civ. No.
Order Granting Defendant Tom Matsuda’s Motion to Dismiss
Complaint Filed March 17, 2017, Defendant Cliff Alakai’s
Dismiss First Amended Complaint Filed on March 17, 2017,
Substantive Joinder to Defendant Matsuda’s and Defendant
Dismiss First Amended Complaint Filed on March 17, 2017
49
16-00582 ACK-RLP,
First Amended
Pre-Answer Motion to
and Jeffrey Kissel’s
Alakai’s Motions to
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