Advanced Recovery Systems v. American Agencies et al
Filing
35
MEMORANDUM DECISION and Order granting in part and denying in part 17 Motion to Dismiss for Failure to State a Claim ; granting 21 Motion to Amend/Correct 2 Complaint. Signed by Judge Dale A. Kimball on 11/7/13. (jlw)
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, NORTHERN DIVISION
ADVANCED RECOVERY SYSTEMS LLC,
MEMORANDUM DECISION
AND ORDER
Plaintiffs,
vs.
Case No. 2:13-CV-00283-DAK
AMERICAN AGENCIES LLC, a Pennsylvania
limited liability company; NATIONAL
RECOVERY AGENCY, a Pennsylvania limited
liability company; and STEVN C. KUSIC, an
individual.
Judge Dale A. Kimball
Defendants.
This matter is before the court on Defendants’ Rule 12(b)(6) motion to dismiss and
Plaintiff’s motion to amend the Complaint. The court held a hearing on October 3, 2013. At the
hearing, Plaintiff was represented by Adam Stevens and Defendants were represented by Leisl
Stevens. The court took the matter under advisement. After considering the briefs and materials
submitted by the parties, the court renders the following Memorandum Decision and Order.
BACKGROUND
Plaintiff Advanced Recovery Systems (ARS) is a Utah limited liability company with its
principal place of business in Provo, Utah. Defendants American Agencies (AA) and National
Recovery Agency (NRA) are Pennsylvania limited liability companies with their principal places
of business in Harrisburg, Pennsylvania. NRA is the parent company of AA. Defendant Steven
C. Kusic is the Chief Executive Officer of NRA and is a resident of Pennsylvania.
On November 11, 2011, ARS and AA entered a license agreement that assigned
exclusive rights to AA from ARS to use software for debt collection services. Under the
agreement, ARS recruited independent licensees to AA and assisted in managing licensees
within AA. In return, AA agreed to pay commissions to ARS. Under Section 3.1.5 of the License
Agreement, AA is required to pay ARS the entire license fees collected from independent
licensees.
Around January or February 2013, ARS alleges that Kusic offered to sell AA to ARS at a
set price of $1.46 million with a payment plan of $200,000 down and financing the difference at
6% over five years. ARS accepted Kusic’s offer and began negotiations for the sale. ARS further
alleges that during these negotiations Kusic held himself out as the owner of AA and demanded a
higher price for AA of $6 million.
In or around March 2013, ARS alleges that AA collected license fees, and, instead of
paying those fees to ARS, AA requested that ARS forward $150,000 in license fees to AA. AA
has failed to return to ARS the $150,000. ARS also alleges that AA has failed to reimburse ARS
for travel expenses, totaling approximately $19,000, as required by Section 4.6 of the License
Agreement.
ARS filed the instant action in this court, alleging causes of action for breach of contract
under the License Agreement, breach of contract in the sale of AA to ARS, unjust enrichment,
conversion of $150,000 in license fees, breach of covenant of good faith and fair dealing, and
money had and received. ARS alleges that AA has failed to pay in full for all license fees
received and that AA has habitually been late in paying the fees that have been paid.
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STANDARD OF REVIEW
When evaluating a Rule 12(b)(6) motion to dismiss, “the court presumes the truth of all
well-pleaded facts in the complaint, but need not consider conclusory allegations.” Margae, Inc.
v. Clear Link Tech., 620 F.Supp.2d 1284, 1285 (D. Utah 2009). “When there are well-pleaded
factual allegations [as opposed to legal conclusions], a court should assume their veracity and
then determine whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556
U.S. 662, 679 (2009). The court should “construe the facts, and reasonable inferences that might
be drawn from them, in favor of the plaintiff.” Padilla v. School Dist. No. 1, 233 F.3d 1268, 1271
(10th Cir. 2000). Consequently, the well-pleaded factual allegations of the Complaint are
presumed true at this point, and if they support the claimed relief, dismissal is improper.
After an answer is filed, a plaintiff may amend his complaint “only with the opposing
party’s written consent or the court’s leave.” Fed. R. Civ. P. 15(a)(2). Under this rule, “[t]he
court should freely give leave” to amend pleadings “when justice so requires.” Id.; see also
Foman v. Davis, 371 U.S. 178, 182 (1962). “A district court should refuse leave to amend only
[upon] a showing of undue delay, undue prejudice to the opposing party, bad faith or dilatory
motive, failure to cure deficiencies by amendments previously allowed, or futility of
amendment.” Wilkerson v. Shinseki, 606 F.3d 1256, 1267 (10th Cir. 2010) (quotations and
citation omitted). The decision whether to allow a party to amend pleadings “is within the
discretion of the trial court.” Minter v. Prime Equip. Co., 451 .3d 1 196, 1204 (10th Cir. 2006).
The outcomes of both motions are necessarily connected, and, therefore, both will be
considered on a claim by claim basis.
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DISCUSSION
Motion to Dismiss
Defendants move to dismiss Kusic and NRA as defendants, arguing that they cannot be
liable for breach of the license agreement because they are not parties to the license agreement.
Defendants also moved to dismiss ARS’s claims for unjust enrichment, conversion, and breach
of implied covenant of good faith and fair dealing asserting that such causes of action are
redundant of the alleged breach of the License Agreement. Further, Defendants moved to dismiss
ARS’s claim for breach of a sales contract, arguing that no contract was ever formed. Lastly,
Defendants move to dismiss ARS’s claim for consequential damages. ARS opposes the motion
and moves to amend its Complaint.
I.
Defendants’ Motion to Dismiss Defendants Kusic and NRA From the Breach of
the License Agreement Claim
Defendants argue that Kusic and NRA should be dismissed from the breach of License
Agreement claim because neither is a party to the License Agreement between ARS and AA.
Defendants claim that Kusic cannot be held personally liable simply as an officer of NRA and
NRA cannot be held liable simply as the parent entity of AA. The general rule in Utah is that
officers, shareholders, and directors are not held personally liable for judgments against the
corporation. U.C.A. 1953 § 48-2c-601; see also Salt Lake City Corp. v. Big Ditch Irrigation Co.,
258 P.3d 539, 545 (Utah 2011). This same rule is generally accepted to apply to limited liability
companies, see Ditty v. Checkrite, Ltd., Inc., 973 F. Supp. 1320, 1335 (D. Utah 1997).1 Similarly,
a parent corporation is not generally liable for the wrongful acts or contractual obligations of a
1
Pennsylvania law is generally consistent with Utah law. 15 Pa.C.S.A. § 8922; see also Donahue v. Custom
Management Corp., 634 F. Supp. 1190, 1200 (W.D. Pa. 1986).
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subsidiary simply because the parent wholly owns the subsidiary. See, e.g., Salt Lake Tribune
Publishing Co., LLC v. AT&T Corp., 2002 U.S. Dist. LEXIS 27804, 37-41 (D. Utah March 27
2002). Therefore, in order to find Kusic or NRA liable for AA’s alleged breach, ARS must be
able to pierce the corporate veil.
Specifically, Defendants assert that ARS fails to plead sufficient facts to establish the
Utah Supreme Court’s eight factors to be considered in determining whether to pierce the
corporate veil, see Jones & Trevor Mktg. v. Lowry, 284 P.3d 630, 636 (Utah 2012), and
consequently ARS’s claims against Kusic and NRA should fail as a matter of law. However, as a
procedural matter, the motion before the Jones & Trevor court was one of summary judgment.
The court in that case explicitly stated that there is not a specific number of factors that must be
met to avoid summary judgment, but rather the factors are merely guidelines used in determining
whether the facts show an alter ego exists. Jones & Trevor, 284 P.3d at 637-38. In contrast, the
current case is before this court on a motion to dismiss and is therefore better compared to
DeMarco v. Lapay, 2012 U.S. Dist. LEXIS 117462 (D. Ut. Aug. 20, 2012). The standard for
avoiding dismissal is necessarily lower since parties have not had a chance to conduct discovery.
In DeMarco, the District Court applied the Utah Supreme Court’s two prong test to
determine if a complaint was sufficient to pierce the corporate veil theory:
(1) there must be such unity of interest and ownership that the separate
personalities of the corporation and the individual no longer exist, viz., the
corporation is, in fact, the alter ego of one or a few individuals; and (2) the
observance of the corporate form would sanction a fraud, promote injustice, or an
inequitable result would follow.
2012 U.S. Dist. LEXIS 117462 at 33-34 (citing Norman v. Murray First Thrift & Loan Co., 596
P.2d 1028, 1030 (Utah 1979)).
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Under the first prong, ARS has alleged in the Amended Complaint that Kusic held
himself out as the owner of AA despite NRA being the true owner of AA. In the Letter of Intent
regarding negotiations to sell AA to ARS, Kusic represented himself as owner of AA and that he
purchased the company in May 2011. Amended Complaint ¶ 25. Furthermore, ARS alleges that
Kusic held himself out as owner of AA in e-mail correspondences to third parties, citing four
specific e-mails in 2012 and 2013. Id. at ¶¶ 26-29. ARS also alleges that Kusic has diverted
potential business of AA to NRA for his own personal gain citing an e-mail dated June, 5, 2012
where Kusic asked, “How do I get NRA as the agency instead of AA?” Id. at ¶ 30. Lastly, ARS
asserts that Kusic, in connection with the alleged sale of AA, admitted to failing to maintain
proper business and accounting records. Id. at ¶ 34. The court presumes these alleged facts in the
Amended Complaint to be true and concludes they are sufficient at this point in the litigation to
plausibly demonstrate that an alter ego may exist between Kusic, NRA, and AA.
Under the second prong of sanctioning a fraud, promoting injustice or an inequitable
result, ARS has alleged that Kusic failed to maintain proper business and/or accounting records
for AA. Consequently, AA’s true financial status is unknown. If ARS’s claims are valid,
premature dismissal of the responsible party or parties could promote an inequitable result. At
this point in the litigation, absent discovery, the court concludes that the Amended Complaint
sufficiently meets DeMarco’s second prong.
Accordingly, the court denies Defendants’ Motion to Dismiss Kusic and NRA from the
breach of the license agreement claim.
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II.
Defendants’ Motion to Dismiss the Breach of Contract to Sell
Defendants argue that no enforceable contract ever existed to sell AA and that ARS’s
breach of sales contract claim should be dismissed. Defendants specifically argue that it is
implausible that the two parties would enter a binding oral contract worth $1.46 million without
more details and formality. Both parties agree that the negotiations were ongoing and Defendants
argue that this shows no binding contract had been entered and the claim should be dismissed.
When making a complaint, the “plaintiff must only give the defendant fair notice of the
nature and basis or grounds of the claim and a general indication of the type of litigation
involved.” Canfield v. Layton City, 122 P.3d 622, 625 (Utah 2005). The elements of a breach of
contract claim are “(1) a contract, (2) performance by the party seeking recovery, (3) breach of
the contract by the other party, and (4) damages.” Bair v. Axiom Design, L.L.C., 20 P.3d 388,
392 (Utah 2001). “Thus, to have stated a claim for breach of contract, [plaintiff] must have
alleged sufficient facts, which we view as true, to satisfy each element.” MBNA America Bank,
N.A. v. Goodman, 140 P.3d 589, 591 (Utah App. 2006).
ARS’s Amended Complaint alleges that Kusic made an offer to sell AA for $1.46 million
with a payment plan of $200,000 down and 6% financing, ARS accepted the terms, and the two
parties formed a contract. Amended Complaint ¶ 58-59. ARS further asserts that it participated in
negotiations and began to secure financing for the sale. Id. at ¶¶ 38-39. Kusic, as the owner of
AA, changed material terms to the proposed sale by refusing to go through with the sale unless
he was paid $6 million, resulting in ARS suffering damages in lost profits, costs in preparing for
the sale, and costs of attorney fees. Id. at ¶¶ 34, 60-62.
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While ARS will need to prove with greater specificity that a valid contract existed to
survive summary judgment or prevail at trial, the Amended Complaint alleges facts showing that
all four of the Bair elements are present. 20 P.3d at 392. ARS’s allegations, therefore, provide a
sufficient basis to notify Defendants of the nature and basis for its claim for breach of contract to
sell.2
Defendants’ Motion to Dismiss ARS’s breach of sales contract claim is denied.
III.
Defendants’ Motion to Dismiss the Unjust Enrichment Claim
Defendants move to dismiss ARS’s unjust enrichment claim, arguing that it is redundant
to the breach of License Agreement claim. As pleaded in the Amended Complaint, ARS or its
agents recruited independent licensees to AA and assisted in managing independent licensees
within AA, which independent licensees brought business and profits to AA. Amended
Complaint, ¶ 15. Sections 2.2 and 4.5 of the License Agreement, allowed, but did not require,
ARS to recruit these independent licensees to AA. Id. ARS claims that the efforts of ARS
conferred a benefit on AA that was outside of the obligations of the License Agreement because
it was not required by the License Agreement and that unjust enrichment is a proper claim for
relief.
Unjust enrichment is a remedy found in quantum meruit and “where an express contract
covering the subject matter of the litigation exists, recovery for unjust enrichment is not
available.” U.S. Fidelity v. U.S. Sports Specialty, 270 P.3d 464, 468-69 (Utah 2012). While
sections 2.2 and 4.5 of the License Agreement only allow and do not require ARS to
2
While Defendants did not raise this argument in their briefs, they did make the argument at the October 3, 2013
hearing that the alleged contract to sell violated the statute of frauds because it could not be completed within one
year. Under the terms of the contract as alleged in the Amended Complaint, the court finds that there were no set
time limits as to when the contract would be completed and consequently it is possible that it could be completed
within a year.
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independently recruit licensees, the License Agreement does in fact outline when and how much
AA should compensate ARS when license fees are collected. Consequently, a claim for unjust
enrichment is inapplicable against AA because the License Agreement is an express contract that
covers the subject matter at issue.
Kusic and NRA, however, are not parties to the License Agreement and, subsequently,
they may be liable for any benefit bestowed upon them by ARS. ARS claims that Kusic diverted
business from AA to NRA to the detriment of ARS. Specifically, ARS incorporates its earlier
allegations that Kusic sent an e-mail to Danico on June 5, 2012 asking how he could “get NRA
as the agency instead of AA.” Amended Complaint ¶ 30. Any benefit received by Kusic or NRA
in this way would not be covered under the License Agreement and, therefore, ARS has a
plausible claim for unjust enrichment against Kusic and NRA.
Accordingly, Defendants’ Motion to Dismiss ARS’s unjust enrichment claim is granted
against AA and denied against Kusic and NRA.
IV.
Defendants’ Motion to Dismiss the Conversion Claim
Defendants move to dismiss ARS’s conversion claim, arguing that it is barred by the
economic loss doctrine. The tort of conversion is barred by the economic loss doctrine “where
the exact same conduct is described in both contract and tort claims.” Grynberg v. Questar
Pipeline Co., 70 P.3d 1, 14 (Utah 2003) (concluding that all of plaintiffs’ tort claims, including
conversion, were barred by the economic loss doctrine “where the exact same conduct is
described in both contract and tort claims”). In its Amended Complaint, ARS claims that AA’s
retention of the $150,000 is both a violation of the License Agreement as well as a tort of
conversion. See Amended Complaint ¶¶ 51, 78. Both claims rely on the exact same set of
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circumstances and alleged facts and, therefore, the tort of conversion is barred by the economic
loss doctrine as against the signatory to the License Agreement, AA.
Kusic and NRA, however, are not parties to the License Agreement. Therefore, the
conversion claim, as asserted against them, is not barred by the economic loss doctrine. At this
point prior to discovery, it is unclear who specifically has exercised dominion and control over
the $150,000 in question. Accordingly, Kusic and NRA may be potentially liable under a claim
for conversion.
Defendants’ motion to dismiss ARS’s conversion claim is granted against AA and denied
against Kusic and NRA.
V.
Defendants’ Motion to Dismiss the Claim of Breach of the Covenant of Good
Faith and Fair Dealing
ARS alleges that Defendants breached the covenant of good faith and fair dealing by
siphoning potential clients of AA to NRA and thereby depriving ARS of potential commissions.
However, where the allegations made in support of the breach of good faith claim are based on
the express terms of the contract, “courts must rely solely on the contract itself and cannot
entertain claims based on an implied duty to perform in good faith.” Freedom Med., Inc. v. Royal
Bank of Canada, 2005 U.S. Dist. LEXIS 37836, 11 (E.D. Pa. Dec. 30, 2005). AA’s failure to pay
for services rendered by ARS is covered expressly in the License Agreement and, therefore,
covered by ARS’s claim for a breach of the License Agreement. Consequently, with respect to
the claim against AA, the court can only look to the contract and not at an implied duty to
perform. Additionally, unlike the tort claim of conversion, a breach of covenant of good faith and
fair dealing claim only applies between parties to a contract. Because neither Kusic nor NRA is a
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party to the License Agreement, AA cannot bring a claim for breach of the covenant against
them.3
Therefore, the court grants Defendants’ motion to dismiss ARS’s breach of the covenant
of good faith and fair dealing claim.
VI.
Defendants’ Motion to Dismiss All Claims for Consequential and Other Damages
Defendants argue that ARS is barred from pursuing consequential damages from AA
because the License Agreement expressly provides that there is “no liability for consequential
damages” and that “neither party shall be liable to the other party for consequential damages of
any kind” License Agreement, §5.13.
However, the Amended Complaint states that ARS seeks relief for “damages for breach
of the agreement to sell AA to ARS and/or its principals, including, but not limited to, all
consequential damages and lost profits.” Amended Complaint, pg. 15 (emphasis added). Because
the Amended Complaint expressly states that consequential damages are sought specifically for
the alleged breach of contract for the sale of AA, the License Agreement does not govern this
issue. The License Agreement and alleged contract for the sale of AA are two independent
contracts. Therefore, the court denies Defendants’ motion to dismiss all claims for consequential
damages.
3
The only potential claim against a non-party to the contract for conduct of the kind alleged against Kusic and NRA
would be the tort of intentional interference with contractual relations. See Wendover City v. W. Wendover City, 404
F. Supp. 2d 1324, 1333 (D. Utah 2005).
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CONCLUSION
For the reasons stated above, Defendant’s Motion to Dismiss is hereby DENIED IN
PART and GRANTED IN PART and Plaintiff’s Motion for Leave to Amend the Complaint is
hereby GRANTED.
DATED this 7th day of November, 2013.
BY THE COURT:
____________________________________
DALE A. KIMBALL,
United States District Judge
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