Hydroblend, Inc. v. Nothum Manufacturing Company

Filing 40

MEMORANDUM DECISION AND ORDER. NOW THEREFORE IT IS HEREBY ORDERED that Defendant's Motion to Dismiss 33 is GRANTED IN PART AND DENIED IN PART as stated herein. Signed by Judge Edward J. Lodge. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (st)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

HYDROBLEND, INC.,
Case No. 1:13-cv-00445-EJL
Plaintiff,
MEMORANDUM DECISION
ORDER

v.
NOTHUM MANUFACTURING
COMPANY, et al.,
Defendants.

Before the Court in the above entitled matter is the Defendant’s Partial Motion to
Dismiss the Second Amended Complaint pursuant to Rules 9(b) and 12(b). The parties
have filed their responsive briefing and the matter is ripe for the Court’s review. Having
fully reviewed the record herein, the Court finds that the facts and legal arguments are
adequately presented in the briefs and record. Accordingly, in the interest of avoiding
further delay, and because the Court conclusively finds that the decisional process would
not be significantly aided by oral argument, the Motion shall be decided on the record
before this Court without oral argument.

MEMORANDUM DECISION ORDER - 1

FACTUAL AND PROCEDURAL BACKGROUND
In September of 2009, Plaintiff Hydroblend, Inc., an Idaho corporation, and
Defendant Nothum Manufacturing Company, a Missouri corporation, executed a Letter of
Understanding which, Hydroblend argues, represented the terms and conditions of the
parties’ legal understanding and agreement to enter into a joint venture for the purpose of
developing and manufacturing a bread crumb applicator machine, for the industrial food
processing marketplace, capable of achieving superior handling and application
characteristics for Hydroblend’s fresh Nama Panko coating. (Dkt. 32 at ¶ 8) (Dkt. 32 at
Ex. A.) The parties also executed a Term Sheet and established a Project Budget which,
Hydroblend argues, summarized the principal terms with respect to the anticipated
formation of the joint venture discussed in the Letter of Understanding. (Dkt. 32 at ¶¶ 8,
9) (Dkt. 32 at Ex. B, C.)1 Under the terms of the Agreements, each party was obligated to
make cash contributions as well as adhere to other duties as outlined in the Agreements.
On October 15, 2013, Hydroblend commenced this action by filing a Verified
Complaint alleging claims against Nothum arising from the Agreements for: 1) Breach of
Contract and Breach of the Covenant of Good Faith and Fair Dealing, 2) Breach of
Fiduciary and Statutory Duties, 3) Fraud, and 4) Dissolution and Winding Up of the Joint
Venture. (Dkt. 1.) Hydroblend essentially claims Nothum failed to perform as required by
the Agreements which created a joint venture. Specifically, Hydroblend alleges Nothum
1

The Court will refer to the Letter of Understanding and Term Sheet (Dkt. 32, Exs. A-C)
collectively as the “Agreements.” When referring to only one of the documents, the Court will use the
particular title of that document.
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violated the terms of the Agreements including failing to meet certain milestones, to
manufacture any functional prototype machines, and to complete regular performance
reports. In addition, the claims allege that Nothum had accepted a purchase order for one
machine at a price of $140,000 from King & Prince and had received a $70,000 down
payment which Nothum used contrary to the terms of the Agreements. Nothum denies
having entered into a written joint venture agreement, disputes whether the Letter of
Understanding constitutes a joint venture, and denies having otherwise breached the terms
of the Agreements.
The Court previously entered an Order granting Nothum’s Motion to Dismiss as to
the second and fourth causes of action of the Complaint alleging breach of fiduciary and
statutory duties and dissolution and winding up of the joint venture. (Dkt. 23.) Thereafter,
Hydroblend filed a First Amended Complaint and Nothum filed a second Motion to
Dismiss. (Dkt. 24, 26.) This Court issued an Order dismissing any UCC based breach of
contract claim, the breach of statutory duties claim, and certain of the damages
allegations. (Dkt. 31.) Hydroblend has now filed its Second Amended Complaint and
Nothum has filed this Motion to Dismiss arguing two particular claims should be
dismissed. (Dkt. 32, 33.) The Court finds as follows.

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STANDARDS OF LAW
A motion to dismiss made pursuant to Federal Rule of Civil Procedure 12(b)(6)
tests the sufficiency of a party’s claim for relief. When considering such a motion, the
Court’s inquiry is whether the allegations in a pleading are sufficient under applicable
pleading standards. Federal Rule of Civil Procedure 8(a) sets forth minimum pleading
rules, requiring only a “short and plain statement of the claim showing that the pleader is
entitled to relief.” Fed. R. Civ. P. 8(a)(2).
A motion to dismiss will only be granted if the complaint fails to allege “enough
facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged. The plausibility standard is not akin to a ‘probability
requirement,’ but it asks for more than a sheer possibility that a defendant has acted
unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citations omitted). Although
“we must take all of the factual allegations in the complaint as true, we are not bound to
accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 U.S. at
555. Therefore, “conclusory allegations of law and unwarranted inferences are
insufficient to defeat a motion to dismiss for failure to state a claim.” Caviness v. Horizon
Comm. Learning Cent., Inc., 590 F.3d 806, 811-12 (9th Cir. 2010) (citation omitted).

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DISCUSSION
Nothum argues Hydroblend’s damages claim for half of a $70,000.00 deposit
should be dismissed as well as its conclusory allegation in Paragraph 50(c) of the Second
Amended Complaint stating that Nothum developed a machine competitive with the joint
venture. (Dkt. 33.) Hydroblend counters that the Second Amended Complaint properly
alleges a claim for misappropriation of the $70,000 down payment as well as the claim in
Paragraph 50(c) that Nothum manufactured a competitive machine. (Dkt. 37.)
The First Cause of Action in the Second Amended Complaint raises a claim for
Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing. (Dkt. 32
at ¶¶ 47-61.) Paragraph 50(c) states:
Nothum materially breached the terms and conditions of the joint venture
agreement by its acts and omissions, including failing:
...
c.
To refrain from developing any other machines competitive with the
joint venture machines;
....
(Dkt. 32 at ¶ 50(c).) Nothum argues this conclusory allegation should be stricken because
“Hydroblend’s entire lawsuit relies on Hydroblend’s allegation that no functional
machine resulted from the joint venture” and there are no “other allegations relating or in
any way alleging Nothum has developed a machine to be competitive with the product
intended to result from the alleged joint venture.” (Dkt. 33 at 4.) Hydroblend responds
that it has plead sufficient facts to go forward with its claim that Nothum manufactured at
least one competitive machine in breach of the parties’ joint venture agreement. (Dkt. 37

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at 6.)
Hydroblend’s argument that Nothum must have manufactured at least one other
machine is based primarily upon the fact that Nothum had informed Hydroblend that it
had a purchase order for one machine from King & Prince and Hydroblend later learned
that Nothum had received $70,000 as a down payment from King & Prince. (Dkt. 32 at
¶ 36-44.) Hydroblend argues Nothum diverted the $70,000 away from the joint venture to
the purchase of other equipment by King & Prince from Nothum, but not manufactured
for or acquired by the joint venture. (Dkt. 32 at ¶ 56, 70, 92, 95.) This conduct,
Hydroblend seems to argue, was in violation of the parties’ agreement that Nothum
refrain from developing any other machines competitive with the joint venture machines.
(Dkt. 32 at ¶ 19.)
Nothum counters that it was not prohibited by the joint venture from continuing to
manufacture its existing line of machines but only required to “refrain from developing
other machines competitive with the joint venture machines.” (Dkt. 38 at 2-3.) Thus,
Nothum’s position appears to be that it had manufactured and sold a machine from its
existing line to King & Prince which was not in breach of its agreement with Hydroblend.
Viewing the allegations in the Second Amended Complaint as true, the Court finds
Hydroblend has failed to state a plausible claim for relief as alleged in Paragraph 50(c)
that Nothum developed a competing machine. There is no allegation in the Second
Amended Complaint that the machine King & Prince agreed to buy was a machine that

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competes with the machine developed under the Letter of Understanding.2 The
paragraphs in the Second Amended Complaint that Hydroblend points to in support of its
claim that Nothum manufactured a competitive machine, do not allege that Nothum
developed any competing machine. (Dkt. 37 at 7) (citing Dkt. 32 at ¶¶ 44, 56, 70, 92, 95.)
Instead, the Second Amended Complaint states that “Nothum did not manufacture a
machine meeting the specifications of the joint venture” but that it manufactured “at least
one machine and related equipment using joint venture funds.” (Dkt. 32 at ¶ 92.) These
allegations relate to Hydroblend’s claim of misappropriation of funds. There are,
however, no facts alleged which support a plausible claim that Nothum “developed any
other machines competitive with the joint venture machines.” (Dkt. 32 at ¶ 50(c).)
Therefore, the Motion to Dismiss is granted as to the claim in Paragraph 50(c).
For the same reasons discussed above, the Court denies the Motion to Dismiss as
to the damages claim regarding the $70,000 payment received by Nothum from King &
Prince. The Second Amended Complaint states a plausible claim that the $70,000
belonged to the joint venture which Nothum improperly diverted, used, or otherwise
failed to properly account for. (Dkt. 32 at ¶¶ 36-44, 56, 70, 92, 95.) The Court notes that
2

Paragraph 36 of the Second Amended Complaint states that: “Sometime during 2012,
Nothum informed Hydroblend that King & Prince of Redmond, Washington had issued a
purchase order for one machine at a purchase price of $115,000.” (Dkt. 32 at ¶ 36.) Arguably
one could infer from this paragraph that the reason Nothum told Hydroblend about this purchase
order because King & Prince wanted to purchase one of the machines that the parties were
developing and the $70,000 down payment was, therefore, joint venture funds. That reasoning
supports Hydroblend’s claim for relief based on misappropriation of joint venture funds. There
are, however, simply no facts that allege the machine King & Prince sought to purchase was a
competing machine.
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Nothum disputes each of these allegations; arguing there was no joint venture and the
funds were not joint venture funds. Those substantive challenges, however, must be
raised and decided in a different motion. For purposes of this Motion to Dismiss, the
Court finds Hydroblend has stated plausible claims which may allow for recovery of
damages related to the $70,000 payment received by Kind & Prince.
ORDER
NOW THEREFORE IT IS HEREBY ORDERED that Defendant’s Motion to
Dismiss is GRANTED IN PART AND DENIED IN PART as stated herein.
DATED: July 27, 2015

Honorable Edward J. Lodge
U. S. District Judge

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