Liberty Mutual Insurance Company v. Hawaiya Technologies, Inc., et al

Filing 42

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF/COUNTER DEFENDANT LIBERTY MUTUAL INSURANCE COMPANY'S MOTION TO DISMISS DEFENDANT HAWAIYA TECHNOLOGIES, INC., PAUL SCHULTZ, AND MUN-WON CHANG'S FIRST AMENDED COUNTERCLAIM, FILED AUGUST 28, 2023 [DKT. NO. 37 ] re 38 - Signed by JUDGE LESLIE E. KOBAYASHI on 11/14/2023. For the foregoing reasons, Liberty Mutual's September 11, 2023 Motion to Dismiss Defendants Hawaiya Technologies, Inc., Paul Schultz , and Mun-Won Chang's First Amended Counterclaim, Filed August 28, 2023 [Dkt. No. 37.] is HEREBY GRANTED IN PART AND DENIED IN PART. The Motion is GRANTED insofar as the First Amended Counterclaim is DISMISSED. The Motion is DENIED insofar as the dismissal is WITHOUT PREJUDICE to the filing of a second amended counterclaim. The HTI Defendants shall file their second amended counterclaim by December 14, 2023. The HTI Defendants are CAUTIONED that, if they fail to file a second amended counterclaim by December 14, 2023, the First Amended Counterclaim will be dismissed with prejudice. (eta)

UNITED STATES DISTRICT COURT
DISTRICT OF HAWAII
LIBERTY MUTUAL INSURANCE
COMPANY, A MASSACHUSETTS
CORPORATION;

CIV. NO. 23-00117 LEK-KJM

Plaintiff,
vs.
HAWAIYA TECHNOLOGIES, INC., A
HAWAII CORPORATION; PAUL
SCHULTZ, AN INDIVIDUAL; MUN-WON
CHANG, AN INDIVIDUAL; PAUL
SCHULTZ, AS CO-TRUSTEE OF THE
PAUL S. SCHULTZ REVOCABLE TRUST;
MUN-WON CHANG, AS CO-TRUSTEE OF
THE PAUL S. SCHULTZ REVOCABLE
TRUST; PAUL SCHULTZ, AS COTRUSTEE OF THE MUN-WON CHANG
REVOCABLE TRUST; MUN-WON CHANG,
AS CO-TRUSTEE OF THE MUN-WON
CHANG REVOCABLE TRUST; AND
DEBORAH P. SIMCOX, AS TRUSTEE OF
THE JANE WON-IM CHANG REVOCABLE
TRUST;
Defendants.
ORDER GRANTING IN PART AND DENYING IN PART
PLAINTIFF/COUNTER DEFENDANT LIBERTY MUTUAL INSURANCE COMPANY’S
MOTION TO DISMISS DEFENDANTS HAWAIYA TECHNOLOGIES, INC.,
PAUL SCHULTZ, AND MUN-WON CHANG’S FIRST
AMENDED COUNTERCLAIM, FILED AUGUST 28, 2023 [DKT. NO. 37.]
Before the Court is Plaintiff/Counter Defendant
Liberty Mutual Insurance Company’s (“Liberty Mutual”) Motion to
Dismiss Defendants Hawaiya Technologies, Inc., Paul Schultz, and
Mun-Won Chang’s First Amended Counterclaim, Filed August 28,
2023 [Dkt. No. 37.] (“Motion”), filed on September 11, 2023.

[Dkt. no. 38.]

Defendants Hawaiya Technologies, Inc. (“HTI”);

Paul Schultz, both individually and as Co-Trustee of the Paul S.
Schultz Revocable Trust and as Co-Trustee of the Mun-Won Chang
Revocable Trust (“Schultz”); and Mun-Wong Chang, individually
and as Co-Trustee of the Paul S. Schultz Revocable Trust and as
Co-Trustee of the Mun-Won Chang Revocable Trust (“Chang” and all
collectively “the HTI Defendants”), filed their memorandum in
opposition on October 6, 2023.

[Dkt. no. 40.]

2023, Liberty Mutual filed their reply.

On October 13,

[Dkt. no. 28.]

The

Court finds this matter suitable for disposition without a
hearing pursuant to Rule LR7.1(c) of the Local Rules of Practice
for the United States District Court for the District of Hawaii
(“Local Rules”).

Liberty Mutual’s Motion is hereby granted in

part and denied in part to the extent that the First Amended
Counterclaim failed to cure the defect concerning detrimental
reliance, and is denied in that the HTI Defendants will be
permitted one last opportunity to amend.
BACKGROUND
Liberty Mutual filed its Complaint on March 3, 2023.
[Dkt. no. 1.]

On April 6, 2023, the HTI Defendants filed their

Counterclaim Against Plaintiff (“Counterclaim”).

[Answer to

Plaintiff’s Complaint Filed on March 3, 2023, filed 4/6/23 (dkt.
no. 20), at pgs. 4-13.]

On July 13, 2023, this Court issued an

order granting Liberty Mutual’s motion to dismiss the
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Counterclaim and granting leave to file an amended counterclaim
by August 28, 2023 (“7/13 Order”).

[Dkt. no. 36.1]

On August

28, 2023, the HTI Defendants filed their First Amended
Counterclaim Against Plaintiff (“First Amended Counterclaim”).
[Dkt. no. 37.]

It asserts a single claim for fraud or

detrimental reliance.

[Id. at pg. 8.]

Many of the factual allegations in the First Amended
Counterclaim repeat the allegations in the original
Counterclaim.

Compare Counterclaim at ¶¶ 4-11, 13, 15-16, with

First Amended Counterclaim at ¶¶ 4-11, 13, 15, 20.

The First

Amended Counterclaim expands upon the allegation in the original
Counterclaim that, during discovery in the prior action between
Liberty Mutual and the HTI Defendants, Liberty Mutual failed to
produce to the HTI Defendants redline and final drawings related
to the allegedly defective work on the project.2

Compare

Counterclaim at ¶ 17, with First Amended Counterclaim at ¶¶ 1619.
During the 2018 Lawsuit, HTI served Liberty Mutual
with Defendant Hawaiya Technologies Inc.’s First Request for

The 7/13 Order is also available at 2023 WL 4534421.
The prior action was Liberty Mutual Insurance Co. v.
Hawaiya Technologies, Inc., et al., CV 18-00410 HG-RLP (“the
2018 Lawsuit”), [Counterclaim at ¶ 13,] and the project at issue
in the 2018 Lawsuit was a construction project at the Halawa
Correctional Facility regarding “Security Electronics & Hardware
Repairs & Improvements (“Halawa Project”), [id. at ¶ 4].
1
2

3

Answers to Interrogatories and First Request for Production of
Documents to Plaintiff in March 2019 (“March 2019 Discovery
Request”).

[First Amended Counterclaim at ¶ 16.]

The March

2019 Discovery Request asked for “Documents” and “electronically
stored information” as these terns are defined in Fed. R. Civ.
P. 34.

[Id.]

Document Request No. 2 of the March 2019

Discovery Request asked Liberty Mutual to “[p]roduce all
documents that support your conclusion in the Claim
Determination Letter that HTI failed to timely address the issue
of incorrectly installed couplings.”

[Id. at ¶ 17.]

The HTI

Defendants allege the issue of incorrectly installed couplings
was “at the heart of the claimed ‘defective work’ on the Halawa
Project[, and] HTI installed the couplings based upon designs
given to them, which Liberty Mutual asserted were installed
incorrectly.”

[Id. at ¶ 18.]

The HTI Defendants allege the

drawings requested in the March 2019 Discovery Request included
drawings of the couplings.

They allege Liberty Mutual responded

to the March 2019 Discovery Request on May 17, 2019, and
produced drawings of couplings that were the original design –
not the final or redline drawings.

[Id. at ¶¶ 18-19.]

The HTI

Defendants also allege that, at the time of the April 26, 2021
agreement between Liberty Mutual and the HTI Defendants to
settle the 2018 Lawsuit (“Settlement Agreement”), HTI believed
the final design for the couplings were what was produced in
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response to the March 2019 Discovery Request, and the HTI
Defendants were not given the redline or final drawings at that
time.

[Id. at ¶¶ 21-22.]
They further allege Liberty Mutual: had a duty to

produce documents pursuant to the March 2019 Discovery Request
that were correct and responded to the request; produced a set
of drawings that were not the redline or final drawings in the
Subcontract; concealed from HTI the redline or final drawings in
the discovery process; knew HTI would rely on the drawings
produced; and knew or should have known they did not produce the
final drawings.

[Id. at ¶¶ 24-29.]

Because HTI was not

involved in the redesign or the review or execution of the
redline or final drawings, the HTI Defendants were unaware these
drawings existed.

Therefore, they allege HTI relied upon the

drawings Liberty Mutual produced when they entered into the 2021
Settlement Agreement.

As such, the HTI Defendants allege

Liberty Mutual committed fraud, HTI detrimentally relied on
Liberty Mutual’s misrepresentations, and HTI suffered damages as
a result.

[Id. at ¶¶ 30-32.]

The HTI Defendants seek recission

of the Settlement Agreement, damages, attorney’s fees and costs
incurred in the litigation of the counterclaim, and any other
appropriate relief.

[Id. at pgs. 10-11.]

In its Motion, brought pursuant to Fed. R. Civ.
P. 9(b) and 12(b)(6), Liberty Mutual contends the HTI
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Defendants’ First Amended Counterclaim must be dismissed with
prejudice because it fails to allege fraud with specificity and
fails to state a claim upon which relief can be granted.
[Motion, Mem. in Supp. at 1-2.]
DISCUSSION
I.

Incorporation by Reference
Preliminarily, the HTI Defendants contend that,

because Liberty Mutual attached an exhibit – a discovery request
- to its Motion, the Motion is converted from a motion to
dismiss into a motion for summary judgment.
5-7.]

[Mem. in Opp. at 3,

Attached to the Motion is Exhibit 1, HTI’s First Request

for Answers to Interrogatories and First Request for Production
of Documents to Plaintiff, dated March 25, 2019.
of Sunny S. Lee (“Lee Decl.”), Exh. 1.]

[Motion, Decl.

This appears to be the

same March 2019 discovery request at issue in the First Amended
Counterclaim, although the First Amended Counterclaim states the
request is dated March 20, 2019, while Exhibit 1 is dated March
25, 2019.

Compare First Amended Counterclaim at ¶¶ 16-18 with

Lee Decl., Exh. 1 at PageID.220.
As a general rule, this Court’s scope of review in
considering a Rule 12(b)(6) motion to dismiss is limited to the
allegations in the pleading.

See Khoja v. Orexigen

Therapeutics, Inc., 899 F.3d 988, 998 (9th Cir. 2018).

If the

district court considers materials beyond the pleadings, “the
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12(b)(6) motion converts into a motion for summary judgment
under [Fed. R. Civ. P.] 56,” and “both parties must have the
opportunity ‘to present all the material that is pertinent to
the motion.’”

Id. (citing and quoting Fed. R. Civ. P. 12(d)).

However, a district court can consider materials beyond the
pleadings without converting the motion to dismiss into a motion
for summary judgment if either the incorporation by reference
doctrine or Fed. R. Evid. 201 judicial notice applies.

Id.

[I]ncorporation-by-reference is a judicially
created doctrine that treats certain documents as
though they are part of the complaint itself.
The doctrine prevents plaintiffs from selecting
only portions of documents that support their
claims, while omitting portions of those very
documents that weaken–or doom–their claims.
Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir.
1998), superseded by statute on other grounds as
recognized in Abrego v. Dow Chem. Co., 443 F.3d
676, 681–82 (9th Cir. 2006) (observing “the
policy concern underlying the rule: Preventing
plaintiffs from surviving a Rule 12(b)(6) motion
by deliberately omitting references to documents
upon which their claims are based”).
Although the doctrine is straightforward in
its purpose, it is not always easy to apply. In
Ritchie, we said that a defendant may seek to
incorporate a document into the complaint “if the
plaintiff refers extensively to the document or
the document forms the basis of the plaintiff’s
claim.” [United States v.] Ritchie, 342 F.3d
[903,] 907 [(9th. Cir. 2003)]. . . .
Id. at 1002.

The Court finds that Exhibit 1 is the March 2019

Discovery Request and that the discovery request is incorporated
by reference into the First Amended Counterclaim because it is

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referred to extensively in the counterclaim, it forms the basis
of the counterclaim, and the HTI Defendants do not dispute the
authenticity of the March 2019 Discovery Request.

See, e.g.,

Chung v. Intellectsoft Grp. Corp., Case No. 21-cv-03074-JST,
2023 WL 5615456, at *2 (N.D. Cal. Aug. 30, 2023) (finding
invoices incorporated by reference into a counterclaim).
Therefore, the Court’s consideration of the March 2019 Discovery
Request does not convert the Motion into a motion for summary
judgment.
II.

Sufficiency of Fraud Allegations
The elements of a fraud claim and the requirements to

satisfy the Fed. R. Civ. P. 9(b) pleading standard are
identified in the 7/13 Order and will not be repeated here.

See

7/13 Order, 2023 WL 4534421, at *3 (quoting Goran Pleho, LLC v.
Lacy, 144 Hawai`i 224, 239, 439 P.3d 176, 191 (2019)); id.
(quoting In re Finjan Holdings, Inc., 58 F.4th 1048, 1057 (9th
Cir. 2023); Benavidez v. Cnty. of San Diego, 993 F.3d 1134, 1145
(9th Cir. 2021)).

In the 7/13 Order, this Court found the HTI

Defendants did not sufficiently plead fraud because, among other
things, the HTI Defendants (1) did not allege why or how Liberty
Mutual’s purposed failure to produce the drawings was
fraudulent, and (2) did not allege that if the HTI Defendants
had received the redline or final drawings, they would not have
entered into the Settlement Agreement.
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Id.

In its Motion,

Liberty Mutual contends the HTI Defendants’ allegations are
still inadequate to plead fraud because the HTI Defendants
failed to: (1) allege with specificity why or how Liberty
Mutual’s purported failure to produce the drawings was
fraudulent; and (2) allege that, had the HTI Defendants received
the drawings, they would not have entered into the settlement
agreement.

[Motion, Mem. in Supp. at 14-15.]
Regarding the first argument, Liberty Mutual contends

the HTI Defendants failed to allege fraud with specificity
because: (1) the HTI Defendants do not allege when the final
drawings were completed, meaning they may not have existed on
June 26, 2018 (the date specified in the discovery request),
[id. at 11-12,] or on April 26, 2021 (the date of the settlement
agreement), [id. at 12-13]; and (2) the HTI Defendants do not
allege Liberty Mutual had the redline or final drawings in their
possession, which is important because Liberty Mutual did not
create the drawings, [id. at 13].

Liberty Mutual contends that,

because the final drawings were produced to HTI in litigation
with BCP and Travelers, the HTI Defendants knew when the final
drawings were completed.

[Id. at 11; First Amended Counterclaim

at ¶ 26.]
Liberty Mutual is correct that the HTI Defendants do
not adequately allege fraud based on the March 2019 Discovery
Request because the HTI Defendants do not allege reliance with
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specificity.

Circumstances constituting fraud “must be specific

enough to give defendants notice of the particular misconduct
which is alleged to constitute the fraud charged so that they
can defend against the charge and not just deny that they have
done anything wrong.”

Bly-Magee v. California, 236 F.3d 1014,

1019 (9th Cir. 2001) (citation and internal quotation marks
omitted).
As to Liberty Mutual’s contention that the HTI
Defendants failed to adequately allege that, had they received
the redline or final drawings, they would not have entered into
the settlement agreement, Liberty Mutual is correct.

This Court

previously noted “[t]he HTI Defendants also fail to allege that,
had they received the drawings, they would not have entered into
the Settlement Agreement.

That is, there are not sufficient

allegations concerning detrimental reliance.”
WL 4534421, at *3.

7/13 Order, 2023

This defect persists in the First Amended

Counterclaim: the HTI Defendants do not allege that they would
not have entered into the Settlement Agreement had they received
the final and/or redline drawings.
reliance remain conclusory.

Instead, the allegations of

See First Amended Counterclaim at

¶¶ 27, 30-32; Nakamoto v. Hartley, 758 F. Supp. 1357, 1365 (D.
Hawai`i 1991) (“Like the other elements of fraud, justifiable
reliance must be pled with particularity.” (citation omitted)).

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However, the First Amended Counterclaim does plead
with particularity why or how Liberty Mutual’s failure to
produce the drawings was fraudulent.

The HTI Defendants have

alleged Liberty Mutual’s failure to adequately respond to the
March 2019 Discovery Request, and has identified the specific
portion of the discovery request that is the basis for this
claim.

[First Amended Counterclaim at ¶¶ 16-19.]

While the HTI

Defendants failed to attach the March 2019 Discovery Request as
an exhibit to the First Amended Counterclaim, and thus failed to
include the definition of “Claim Determination Letter” raised in
Document Request No. 2, see id. at ¶ 19, the entire March 2019
Discovery Request is incorporated by reference into the First
Amended Counterclaim, as determined supra Section I.

The HTI

Defendants also specify what is missing in Liberty Mutual’s
Response to the March 2019 Discovery Request: the as-built or
redline drawings.

[First Amended Counterclaim at ¶ 19.]

The

HTI Defendants need not allege the date these redline drawings
were completed, nor that Liberty Mutual had these drawings in
their possession.

The allegations in the First Amended

Counterclaim are “specific enough to give [Liberty Mutual]
notice of the particular misconduct which is alleged to
constitute the fraud charged so that they can defend against the
charge and not just deny that they have done anything wrong.”
See Bly-Magee, 236 F.3d at 1019.
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Because the reliance element of fraud is not pled with
particularity, the HTI Defendant’s First Amended Counterclaim
fails to plead a plausible fraud claim and must be dismissed.
See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (“To survive a
motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is
plausible on its face.” (citation and internal quotation marks
omitted)).

The HTI Defendants represent that they have “done

additional investigation” and therefore ask that they be allowed
to amend their counterclaim.

[Mem. in Opp. at 3.]

The HTI

Defendants were specifically instructed by this Court that their
allegations concerning detrimental reliance were insufficient,
see 7/13 Order, 2023 WL 4534421, at *3, and the HTI Defendants
failed to cure this defect when they filed the First Amended
Counterclaim.

However, because it is possible for the HTI

Defendants to cure the defect by amendment, the HTI Defendants
will be granted leave to amend.

See Hoang v. Bank of Am., N.A.,

910 F.3d 1096, 1102 (9th Cir. 2018) (“Dismissal with prejudice
and without leave to amend is not appropriate unless it is clear
. . . that the complaint could not be saved by amendment.”
(citation and quotation marks omitted)).

However, the HTI

Defendants are CAUTIONED that, if their second amended
counterclaim fails to sufficiently allege detrimental reliance,

12

their second amended counterclaim may be dismissed with
prejudice.
CONCLUSION
For the foregoing reasons, Liberty Mutual’s
September 11, 2023 Motion to Dismiss Defendants Hawaiya
Technologies, Inc., Paul Schultz, and Mun-Won Chang’s First
Amended Counterclaim, Filed August 28, 2023 [Dkt. No. 37.] is
HEREBY GRANTED IN PART AND DENIED IN PART.

The Motion is

GRANTED insofar as the First Amended Counterclaim is DISMISSED.
The Motion is DENIED insofar as the dismissal is WITHOUT
PREJUDICE to the filing of a second amended counterclaim.

The

HTI Defendants shall file their second amended counterclaim by
December 14, 2023.

The HTI Defendants are CAUTIONED that, if

they fail to file a second amended counterclaim by December 14,
2023, the First Amended Counterclaim will be dismissed with
prejudice.
IT IS SO ORDERED.

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DATED AT HONOLULU, HAWAII, November 14, 2023.

LIBERTY MUTUAL INSURANCE COMPANY VS. HAWAIYA TECHNOLOGIES, INC.,
ET AL; CV 23-00117 LEK-KJM; ORDER GRANTING IN PART AND DENYING
IN PART PLAINTIFF/COUNTER DEFENDANT LIBERTY MUTUAL INSURANCE
COMPANY’S MOTION TO DISMISS DEFENDANTS HAWAIYA TECHNOLOGIES,
INC., PAUL SCHULTZ, AND MUN-WON CHANG’S FIRST AMENDED
COUNTERCLAIM, FILED AUGUST 28, 2023 [DKT. NO. 37]

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