Najarian Holdings LLC v. CoreVest American Finance Lender LLC

• Court: District Court, N.D. California
• Decided: July 9, 2020
• Docket: 4:20-cv-00799
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA

7 NAJARIAN HOLDINGS LLC, et al., Case No. 20-cv-00799-PJH 8 Plaintiffs,

9 v. ORDER GRANTING IN PART AND DENYING IN PART MOTION TO 10 COREVEST AMERICAN FINANCE DISMISS LENDER LLC, 11 Re: Dkt. No. 26 Defendant. 12

13 14 Before the court is defendant Corevest American Finance Lender LLC’s1 15 (“Corevest” or “defendant”) motion to dismiss. The matter is fully briefed and suitable for 16 resolution without oral argument. Having read the papers filed by the parties and 17 carefully considered their arguments and the relevant legal authority, and good cause 18 appearing, the court rules as follows. 19 BACKGROUND 20 On February 3, 2020, plaintiffs Najarian Holdings LLC and Najarian Capital LLC 21 (collectively “plaintiffs”) filed a complaint alleging five causes of action. Dkt. 1. The 22 parties stipulated to plaintiffs filing both amended complaint (Dkt. 19) and the operative 23 Second Amended Complaint (“SAC,” Dkt. 22). The SAC alleges seven causes of action: 24 (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) fraud; 25 (4) negligent misrepresentation; (5) unfair competition; (6) punitive damages; and 26

27 1 The complaint originally named CAF Lending LLC as defendant. Pursuant to a 1 (7) attorneys’ fees. Dkt. 22. Defendant now moves to dismiss the second through 2 seventh claims pursuant to Federal Rule of Civil Procedure 12(b)(6). 3 Najarian Holdings LLC and Najarian Capital LLC are Georgia limited liability 4 companies with their principal place of business in Atlanta, Georgia. Id. ¶ 2. The 5 defendant at the time of the incident, CAF Lending LLC, was a Delaware limited liability 6 company with a principal place of business in New York, New York. Id. ¶ 3. Plaintiffs are 7 in the business of purchasing residences at foreclosure sales and then reselling those 8 residences. Id. ¶ 6. Starting in 2014, defendant would loan money to plaintiffs either at 9 the time of acquisition or shortly thereafter and, accordingly, the parties entered into 10 revolving loan agreements and revolving promissory notes secured by deeds of trust, 11 which the parties are collectively labeling as the “Loan Documents.” Id. 12 In the normal course of business, defendant would render invoices to plaintiffs in a 13 timely manner, which permitted plaintiffs to assess, challenge, and validate each invoice 14 within a fifteen-day grace period permitted under the promissory notes. Id. ¶ 8. Under 15 the terms of the Loan Documents, plaintiffs were obligated to pay outstanding sums due 16 on the first day of each month and, after the fifteen day grace period, defendant was 17 permitted to charge a default interest rate on the entire amount of loans that had matured 18 or otherwise come due in full. Id. ¶ 7. The agreements also permitted defendant to 19 collect a “late or collection charge, as liquidated damages, equal to ten percent (10%) of 20 the amount of such unpaid payment or deposit” that had become due. Id. 21 The conduct at issue in the SAC arose in March 2016 when defendant allegedly 22 changed its billing practices to send invoices after the first of each month resulting in less 23 time for plaintiffs to assess and challenge the invoices prior to the expiration of the grace 24 period. Id. ¶ 8. Due to defendant’s practice of sending late invoices, plaintiffs frequently 25 made payments that defendant deemed late; in 2016 and early 2017, defendant 26 assessed, and plaintiffs paid, late fees in excess of $75,000. Id. ¶ 9. Defendant also 27 charged plaintiffs late fees calculated as a percentage of the outstanding principal 1 on matured amounts as illegal because they are void as a matter of public policy. Id. 2 On February 1, 2017, plaintiffs’ managing member, Zareh Najarian, sent an email 3 to defendant’s vice president, Stephanie Casper, complaining about $30,000 in late fees. 4 Id. ¶ 11. The same day defendant’s vice president responded that “the late fees cannot 5 be waived. As we discussed on the phone, I can offer a rebate on the new line [of 6 credit’s] advance fees, but I cannot waive [the late fees].” Id. On February 9, 2020, 7 defendant’s vice president sent a second email to plaintiffs:

8 Zareh, When we spoke last week Wednesday I explained that there would be 5% late fee calculated on the principal balance 9 of the matured assets to the tune of $56,000 or so, over and above the late fees charged on interest late pays (Roughly 10 $14K in yet to be assessed via the payoff quotes). As you will recall, we had encouraged you to execute the extension 11 agreement in December, this would have only cost you only [sic] $11K. The late fees, per the loan agreement, are 12 calculated on any past due amounts, interest and/or principal. 13 Id. ¶ 12 (alteration in original). The vice president sent a third email a few weeks later 14 stating “We will do an extension for .5% for 30 days on the 4 assets. This will prevent 15 you from having to pay 5% on the principal and interest saving you over $20,000!!” Id. 16 ¶ 13. Plaintiffs characterize these emails from defendant as an attempt to coerce 17 plaintiffs into paying illegal fees with a promise to rebate some of the late fees if plaintiffs 18 agreed to sign a new line of credit agreement. Id. ¶ 11. 19 Separately from the foregoing conduct, plaintiffs allege that defendant demanded 20 that plaintiffs pay a $250 release fee in exchange for defendant’s releases of its security 21 interests in properties sold by plaintiffs. Id. ¶ 15. These release fees are not mentioned 22 in the Loan Documents. Id. Plaintiffs also allege that defendant provided them with 23 payoff statements for properties for which the loan was about to mature or had recently 24 matured. Id. ¶ 22. Plaintiffs allege that the payoff statements materially misstated the 25 amounts later invoiced by defendant such that defendant would end up charging amounts 26 substantially more than the sums earlier communicated to plaintiffs. Id. 27 / / / 1 DISCUSSION 2 A. Legal Standard 3 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests for the 4 legal sufficiency of the claims alleged in the complaint. Ileto v. Glock Inc., 349 F.3d 1191, 5 1199–1200 (9th Cir. 2003). Under Federal Rule of Civil Procedure 8, which requires that 6 a complaint include a “short and plain statement of the claim showing that the pleader is 7 entitled to relief,” Fed. R. Civ. P. 8(a)(2), a complaint may be dismissed under Rule 8 12(b)(6) if the plaintiff fails to state a cognizable legal theory, or has not alleged sufficient 9 facts to support a cognizable legal theory. Somers v. Apple, Inc., 729 F.3d 953, 959 (9th 10 Cir. 2013). 11 While the court is to accept as true all the factual allegations in the complaint, 12 legally conclusory statements, not supported by actual factual allegations, need not be 13 accepted. Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009). The complaint must proffer 14 sufficient facts to state a claim for relief that is plausible on its face. Bell Atl. Corp. v. 15 Twombly, 550 U.S. 544, 555, 558–59 (2007). 16 “A claim has facial plausibility when the plaintiff pleads factual content that allows 17 the court to draw the reasonable inference that the defendant is liable for the misconduct 18 alleged.” Iqbal, 556 U.S. at 678. “[W]here the well-pleaded facts do not permit the court 19 to infer more than the mere possibility of misconduct, the complaint has alleged—but it 20 has not ‘show[n]’—‘that the pleader is entitled to relief.’” Id. at 679 (quoting Fed. R. Civ. 21 P. 8(a)(2)). Where dismissal is warranted, it is generally without prejudice, unless it is 22 clear the complaint cannot be saved by any amendment. In re Daou Sys., Inc., 411 F.3d 23 1006, 1013 (9th Cir. 2005). 24 Review is generally limited to the contents of the complaint, although the court can 25 also consider documents “whose contents are alleged in a complaint and whose 26 authenticity no party questions, but which are not physically attached to the plaintiff’s 27 pleading.” Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005) (quoting In re Silicon 1 other grounds as stated in In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130 (9th Cir. 2 2017)); see also Sanders v. Brown, 504 F.3d 903, 910 (9th Cir. 2007) (“[A] court can 3 consider a document on which the complaint relies if the document is central to the 4 plaintiff’s claim, and no party questions the authenticity of the document.” (citation 5 omitted)). The court may also consider matters that are properly the subject of judicial 6 notice (Lee v. City of Los Angeles, 250 F.3d 668, 688–89 (9th Cir. 2001)), and exhibits 7 attached to the complaint (Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 8 1542, 1555 n.19 (9th Cir. 1989)). 9 For plaintiffs’ claims that sound in fraud, the complaint must also meet the 10 heightened pleading standard of Federal Rule of Civil Procedure 9(b). See Kearns v. 11 Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). Rule 9(b) requires a party alleging 12 fraud or mistake to state with particularity the circumstances constituting fraud or mistake. 13 “To satisfy Rule 9(b)’s particularity requirement, the complaint must include an account of 14 the time, place, and specific content of the false representations as well as the identities 15 of the parties to the misrepresentations.” Depot, Inc. v. Caring for Montanans, Inc., 915 16 F.3d 643, 668 (9th Cir. 2019) (internal quotation marks omitted). In other words, 17 “[a]verments of fraud must be accompanied by ‘the who, what, when, where, and how’ of 18 the misconduct charged.” Kearns, 567 F.3d at 1124. Plaintiffs must also offer “an 19 explanation as to why the statement or omission complained of was false or misleading.” 20 In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc), superseded 21 by statute on other grounds as stated in SEC v. Todd, 642 F.3d 1207, 1216 (9th Cir. 22 2011). 23 B. Analysis 24 1. Second Claim: Breach of Covenant of Good Faith and Fair Dealing 25 Plaintiffs’ second claim is for the breach of the implied covenant of good faith and 26 fair dealing. Every contract “imposes upon each party a duty of good faith and fair 27 dealing in its performance and its enforcement.” McClain v. Octagon Plaza, LLC, 159 1 good faith and fair dealing, a plaintiff must establish the existence of a contractual 2 obligation, along with conduct that frustrates the other party’s rights to benefit from the 3 contract. See Racine & Laramie v. Dep’t of Parks & Rec., 11 Cal. App. 4th 1026, 1031 4 (Ct. App. 1992); see also Guz v. Bechtel Nat. Inc., 24 Cal. 4th 317, 349–50 (2000) 5 (stating that the covenant of good faith and fair dealing cannot “be endowed with an 6 existence independent of its contractual underpinnings,” and thus “cannot impose 7 substantive duties or limits on the contracting parties beyond those incorporated in the 8 specific terms of their agreement” (citations omitted)); Smith v. City and Cty. of San 9 Francisco, 225 Cal. App. 3d 38, 49 (Ct. App. 1990) (“Without a contractual relationship, [a 10 plaintiff] cannot state a cause of action for breach of the implied covenant.”). 11 Defendant argues that plaintiffs have not pleaded a special relationship between 12 them and defendant, which is required to recover in tort for a breach of the implied 13 covenant of good faith and fair dealing. Mtn. at 13. Instead, defendant contends this 14 case is an ordinary commercial contract that does not give rise to the special relationship 15 needed to sustain an implied covenant claim. Id. at 14. Defendant also contends that 16 plaintiffs’ allegations confirm that their implied covenant claim is duplicative of their 17 breach of contract claim. Id. at 15. In response, plaintiffs argue that they do not need to 18 allege or prove a special relationship to state a claim for breach of the implied covenant 19 of good faith and fair dealing. Opp. at 13. Plaintiffs also argue that the implied covenant 20 claim cannot be dismissed at this stage because defendant has not pleaded a response 21 to plaintiffs’ breach of contract claim. Id. at 14. 22 At the outset, the court notes that plaintiffs have not specified whether they allege 23 their second claim as a breach of an implied contract, sounding in contract, or as a 24 tortious breach of the implied covenant. For example, in their opposition brief, plaintiffs 25 argue that the special relationship test is not a necessary allegation where “the duty that 26 gives rise to tort liability is either completely independent of the contract or arises from 27 conduct which is both intentional and intended to harm.” Opp. at 13 (quoting Bales v. 1 The reference to Bales and tort liability suggests that plaintiffs seek to recover in tort for 2 breach of the implied covenant of good faith and fair dealing. 3 As a general rule, “[b]ecause the [implied] covenant is a contract term . . . 4 compensation for its breach has almost always been limited to contract rather than tort 5 remedies.” Foley v. Interactive Data Corp., 47 Cal. 3d 654, 684 (1988). “Generally, no 6 cause of action for the tortious breach of the implied covenant of good faith and fair 7 dealing can arise unless the parties are in a special relationship with fiduciary 8 characteristics.” Pension Tr. Fund v. Fed. Ins. Co., 307 F.3d 944, 955 (9th Cir. 2002); 9 see also Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal. App. 3d 1371, 1395 (Ct. 10 App. 1990) (“A review of those cases demonstrates that the existence of this remedy has 11 been justified by the “special relationship” existing between insurer and insured, which is 12 characterized by elements of public interest, adhesion and fiduciary responsibility.”). 13 “[T]he implied covenant tort is not available to parties of an ordinary commercial 14 transaction where the parties deal at arms’ length.” Pension Tr. Fund, 307 F.3d at 955. 15 “California courts do not invoke a special relationship between a lender and borrower.” 16 Kroetch v. BAC Home Loan Servs., No. C 11-2860 MEJ, 2011 WL 4502350, at *4 (N.D. 17 Cal. Sept. 27, 2011) (citing Kim v. Sumitomo Bank, 17 Cal. App. 4th 974, 979 (Ct. App. 18 1993) (“[T]he relationship of a bank-commercial borrower does not constitute a special 19 relationship for the purposes of the covenant of good faith and fair dealing.”); and Mitsui 20 Mfrs. Bank v. Superior Court, 212 Cal. App. 3d 726 (Ct. App. 1989)). An exception to this 21 general rule may exist if “the financial dependence or personal security by the damaged 22 party has been entrusted to the other” or “when [the lender] excessively controls or 23 dominates the borrower.” Pension Tr. Fund, 307 F.3d at 955 (citations omitted). 24 The foregoing cases demonstrate that if plaintiffs intended to plead their second 25 claim as a tortious breach of the implied covenant, then they have not alleged sufficient 26 facts that they are in a special relationship with fiduciary characteristics or that they meet 27 a relevant exception to the special relationship, such as that defendant excessively 1 currently alleged, the SAC does not suggest the relationship between the parties was 2 anything other than arm’s length transactions between a bank and commercial borrower. 3 Notably, the parties entered into a contractual relationship and performed under the 4 terms of those agreements for over a year without alleging any malfeasance. SAC ¶ 8. 5 When the issue of late fees first arose, plaintiffs paid late fees totaling $75,000 in 2016 6 without registering any complaint with defendant. Id. ¶ 9. When plaintiffs did complain in 7 February 2017 concerning $30,000 in late fees, defendant’s vice president responded 8 that the late fees would not be waived. Id. ¶ 11. The remaining communications from 9 defendant indicate a summary of a past offer for a renewed line of credit and a renewal of 10 that offer. As alleged, the facts plausibly suggest a disagreement about the amount 11 owed and whether the late fees should be waived or charged but does not plausibly rise 12 to the level of excessive control or domination. 13 If, however, plaintiffs intended to plead their second claim as a breach of the 14 implied covenant of good faith and fair dealing sounding in contract, then they would not 15 need to allege facts supporting a special relationship between the parties. See Careau & 16 Co., 222 Cal. App. 3d at 1392 (“Although plaintiffs have characterized this count as the 17 tortious breach of the implied covenant, it is obviously possible to state a cause of action 18 for a breach of such covenant even though no basis for a tort recovery exists.”). 19 “Notably, although the California Supreme Court has held that a plaintiff may bring both a 20 breach of contract claim and a claim for breach of the implied covenant of good faith and 21 fair dealing, the Supreme Court has made clear that when both causes of action cite the 22 same underlying breach, the implied covenant cause of action will be superfluous with 23 the contract cause of action.” Landucci v. State Farm Ins. Co., 65 F. Supp. 3d 694, 716 24 (N.D. Cal. 2014) (citing Guz, 24 Cal. 4th at 327 (“[W]here breach of an actual term is 25 alleged, a separate implied covenant claim, based on the same breach is superfluous.”)). 26 “In other words, a claim alleging breach of the implied covenant of good faith and fair 27 dealing cannot be ‘based on the same breach as the contract claim,’ or else it will be 1 10–CV–03032 LHK, 2010 WL 4510911, at *4 (N.D. Cal. Nov. 1, 2010)). 2 Here, plaintiffs bring a breach of contract claim alleging that defendant breached 3 the agreements between the parties by charging and collecting late fees that were void 4 and unenforceable under California law. SAC ¶ 24. They also allege that defendant 5 charged and collected release fees that were not authorized by the contracts. Id. ¶ 25. 6 Much of that conduct and the corresponding relief is duplicated in plaintiffs’ implied 7 covenant claim. Their implied covenant claim alleges that defendant engaged in conduct 8 such as misrepresentations in payoff statements, assessments of unauthorized fees, 9 misrepresentations that deceived plaintiffs into thinking that certain fees were authorized 10 by the agreement, delivery of late invoices, and assurances that defendant would waive 11 its fees if plaintiffs agreed to extend and renew the loan agreements. Id. ¶ 28. To the 12 extent that the implied covenant claim seeks to recover the same late fees and release 13 fees as are sought under plaintiffs’ breach of contract claim, the implied covenant claim is 14 superfluous of the breach of contract claim and cannot state a claim. 15 However, at least some of the conduct alleged is not superfluous. Specifically, 16 plaintiffs allege that defendant materially misstated amounts owed on payoff statements 17 and defendant later demanded greater sums than on the payoff statements. Id. ¶ 22. 18 Plaintiffs felt obligated to pay those statements in order to protect themselves from 19 buyers who sought to close on the homes which were subjects of the payoff statements. 20 Id. A claim for breach of the implied covenant of good faith and fair dealing requires the 21 existence of a contract and some conduct by defendant that frustrated plaintiffs’ right to 22 benefit under the contract. The parties do not dispute the existence of a contract and the 23 misstated payoff statements plausibly frustrated plaintiffs’ right to benefit under the 24 contract. It may be the case that the allegations concerning payoff statements are 25 ultimately subsumed into resolution of an express contract term, but at this stage, 26 plaintiffs have plausibly stated a claim. 27 To the extent that plaintiffs’ second claim alleges conduct superfluous of the 1 cure the deficiency. However, defendant’s motion is DENIED to the extent plaintiffs’ 2 claim alleges conduct relating to payoff statements. 3 2. Third & Fourth Claims: Fraud & Negligent Misrepresentation 4 Plaintiffs’ third claim is for fraud and their fourth claim is for negligent 5 misrepresentation. “The elements of a cause of action for fraud in California are: ‘(a) 6 misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge 7 of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; 8 and (e) resulting damage.’” Kearns, 567 F.3d at 1126 (quoting Engalla v. Permanente 9 Med. Grp., Inc., 15 Cal. 4th 951, 974 (1997)). The elements of negligent 10 misrepresentation are (1) the misrepresentation of a past or existing material fact; (2) 11 without reasonable ground for believing it to be true; (3) with intent to induce another’s 12 reliance on the fact misrepresented; (4) justifiable reliance on the misrepresentation; and 13 (5) resulting damage. Apollo Capital Fund, LLC v. Roth Capital Partners, LLC, 158 Cal. 14 App. 4th 226, 243 (Ct. App. 2007). “In contrast to fraud, negligent misrepresentation 15 does not require knowledge of falsity.” Id. Instead, “[a] person who makes false 16 statements, honestly believing that they are true, may still be liable for negligent 17 misrepresentation if he or she has no reasonable grounds for such belief.” Id. (internal 18 quotations omitted). 19 a. Economic Loss Rule 20 Defendant argues that the economic loss rules bars plaintiffs’ fraud and negligent 21 misrepresentation claims. Mtn. at 6. According to defendant, plaintiffs have not alleged 22 any fraudulent conduct independent of their breach of contract claim. Id. Plaintiffs argue 23 that this case is analogous to the California Supreme Court’s decision in Robinson 24 Helicopter Co. v. Dana Corp., 34 Cal. 4th 979 (2004), which permitted a tort claim based 25 on conduct independent of the breach of contract claim. Opp. at 7–8. According to 26 plaintiffs, defendant’s representative falsely represented that the late fees were legal and 27 authorized by the parties’ contracts. Id. at 8. 1 promise through contract law, except when the actions that constitute the breach violate 2 a social policy that merits the imposition of tort remedies.” Robinson Helicopter, 34 Cal. 3 4th at 991–92 (quoting Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal. 4th 85, 107 4 (1995) (Mosk, J., concurring in part)). The economic loss rule “requires a purchaser to 5 recover in contract for purely economic loss due to disappointed expectations, unless he 6 can demonstrate harm above and beyond a broken contractual promise.” Id. at 988. 7 “Economic loss consists of damages for inadequate value, costs of repair and 8 replacement of the defective product or consequent loss of profits—without any claim of 9 personal injury or damages to other property.” Id. (citing Jimenez v. Superior Court, 29 10 Cal. 4th 473, 482 (2002)). The purpose of the economic loss rule is to “prevent the law of 11 contract and the law of tort from dissolving one into the other.” Id. 12 In Robinson Helicopter, the California Supreme Court considered a post-trial 13 challenge to a jury’s punitive damages award that was premised upon its finding that a 14 defendant-supplier “not only breached its contract . . . but also had made false 15 misrepresentations of fact and had knowingly misrepresented or concealed material facts 16 with the intent to defraud.” Id. at 987. In part, those misrepresentations were based on 17 the defendant’s false certificates representing to the plaintiff-helicopter manufacturer that 18 the clutch components provided conformed to the parties’ previously agreed to 19 specifications. Id. at 990. Once mechanical issues with the plaintiff’s helicopters began 20 to arise, regulatory authorities required the plaintiff to recall and replace the faulty 21 clutches. Id. at 987. To comply, the plaintiff paid over $1.5 million for replacement parts 22 and labor to identify and resolve those issues. Id. at 987 23 The court in Robinson Helicopter concluded that “the economic loss rule does not 24 bar [plaintiff’s] fraud and intentional misrepresentation claims because they were 25 independent of [defendant’s] breach of contract.” Id. at 991. The provision of false 26 certificates was independent of the breach of contract. Significantly, the court 27 characterized its holding as “limited to a defendant’s affirmative misrepresentations on 1 independent of the plaintiff’s economic loss.” Id. at 993. 2 Here, the same conduct that supports plaintiffs’ breach of contract claim also 3 underpins their fraud and negligent misrepresentation claims. The breach of contract 4 claim alleges that defendant charged and collected late fees that were void and 5 unenforceable penalties under California Civil Code § 1671. SAC ¶ 24. The breach of 6 contract claim also alleges that defendant charged and collected release fees that were 7 not authorized by the Loan Documents. Id. ¶ 25. Plaintiffs’ fraud claim alleges that 8 defendant falsely represented to plaintiffs that release fees and late fees on outstanding 9 balances were due to defendant and would have to be paid by plaintiffs in order to obtain 10 releases of defendant’s liens on plaintiffs’ properties. Id. ¶ 30. The claim for negligent 11 misrepresentation follows a similar track. See id. ¶ 32. The only damages identified by 12 plaintiffs are fees, charges, and penalties paid by Najarian Holdings and Najarian 13 Capital—at least $120,000 and $90,000 respectively—to defendant. Id. ¶ 4. These 14 losses are economic losses and plaintiffs cannot state a claim for their recovery unless 15 they can allege a violation of a duty independent of the contract arising from principles of 16 tort law. 17 They have not done so. In their opposition, plaintiffs argue that the SAC alleges 18 an independent tort based on facts analogous to those in Robinson Helicopter. Opp. at 19 7. The exception discussed by the California Supreme Court in Robinson Helicopter 20 does not apply here for at least two reasons.2 First, as discussed, the conduct alleged in 21 plaintiffs’ third and fourth claims directly relate to the same conduct supporting the breach 22 of contract claim—the dispute over whether plaintiffs should have paid late fees and 23 release fees. Second, plaintiffs do not allege that they have been exposed to liability for 24

25 2 Several district courts have questioned whether Robinson Helicopter’s analysis extends beyond products liability cases, upon which the Robinson Helicopter court relied. See 26 Westport Ins. Corp. v. Vasquez, Estrada & Conway LLP, No. 15-CV-05789-JST, 2016 WL 1394360, at *6 (N.D. Cal. Apr. 8, 2016) (collecting cases); United Guar. Mortg. 27 Indem. Co. v. Countrywide Fin. Corp., 660 F. Supp. 2d 1163, 1183 (C.D. Cal. 2009). 1 “personal damages independent of the plaintiff’s economic loss.” Robinson Helicopter, 2 34 Cal. 4th at 993; see also Crystal Springs Upland Sch. v. Fieldturf USA, Inc., 219 F. 3 Supp. 3d 962, 970 (N.D. Cal. 2016) (“[A] negligent misrepresentation claim paralleling a 4 contract claim that prays only for economic damages will be barred by the economic loss 5 rule unless the plaintiff alleges both that the defendant made an affirmative 6 misrepresentation, and that the defendant’s misrepresentation exposed the plaintiff to 7 independent personal liability.”). 8 The foregoing discussion demonstrate why this is a straightforward application of 9 the economic loss rule. The following summary from a district court describes the issue: 10 “Put simply, [plaintiffs have] taken the allegations underpinning a straightforward claim for 11 breach of a commercial contract and recast them as torts. The tort claims consist of 12 nothing more than [defendant’s] alleged failure to make good on its contractual 13 promises.” JMP Sec. LLP v. Altair Nanotechnologies Inc., 880 F. Supp. 2d 1029, 1043 14 (N.D. Cal. 2012). 15 Application of the economic loss rule serves as a sufficient basis to conclude that 16 plaintiffs cannot state a claim for fraud, as currently alleged. However, district courts in 17 the Ninth Circuit are split over whether the economic loss rule bars a negligent 18 misrepresentation claim. See Broomfield v. Craft Brew All., Inc., No. 17-CV-01027-BLF, 19 2017 WL 3838453, at *9 (N.D. Cal. Sept. 1, 2017) (discussing split). Part of the 20 confusion stems from an unpublished Ninth Circuit opinion holding, without any 21 discussion of the case, that Robinson Helicopter permits economic losses for a negligent 22 representation claim. See Kalitta Air, L.L.C. v. Cent. Texas Airborne Sys., Inc., 315 Fed. 23 App’x 603, 607 (9th Cir. 2008). This court need not resolve the split over negligent 24 misrepresentation because plaintiffs’ fraud and negligent misrepresentation claims fail for 25 at least one further reason. 26 b. Rule 9(b) Heightened Pleading Requirement 27 As stated, “[a]verments of fraud must be accompanied by ‘the who, what, when, 1 also offer “an explanation as to why the statement or omission complained of was false or 2 misleading.” In re GlenFed, Inc. Sec. Litig., 42 F.3d at 1548. 3 Defendant argues that plaintiffs have only identified three email statements from 4 defendant’s vice president, Stephanie Casper, in which she made specific factual 5 representations. See SAC ¶¶ 11–13. According to defendant, the SAC contains no 6 explanation or factual information as to whether or why any of these specific 7 representations were false or misleading. Mtn. at 11–12. Plaintiffs argue that the 8 statements were intended to mollify and mislead plaintiffs so they would continue to pay 9 late fees and not contest payment of past late fees. Opp. at 12. Plaintiffs also indicate 10 that they could address any failure to adequately allege false or misleading statements in 11 an amended complaint. Id. at 12–13. 12 As currently alleged, the SAC fails Rule 9(b)’s heightened pleading requirement. 13 Plaintiffs have satisfied the specificity requirement by identifying a person and specific 14 alleged statements made by that person. What is lacking is any corresponding allegation 15 supporting why the statements were false or misleading. Casper’s email includes 16 affirmative statements that defendant would not waive the late fees. SAC ¶ 11 (“I can 17 offer a rebate on the new line’s advance fees, but I cannot waive them . . .”). There are 18 also statements amounting to an explanation as to the amount of fees if plaintiffs had 19 accepted a previously offered extension on a loan agreement. Id. ¶ 12 (“As you will 20 recall, we had encouraged you to execute the extension agreement in December, this 21 would have only cost you only [sic] $11K.”). Finally, there is a renewed offer for an 22 extension on the agreement. Id. ¶ 13 (“We will do an extension for .5% for 30 days on 23 the 4 assets.”). 24 Those statements appear to be no different than business negotiations concerning 25 late fees and renegotiation of an agreement. Moreover, the allegations of fraud and 26 misrepresentation rely on a presumption on the part of plaintiffs that the late fees in 27 question are illegal under California Civil Code § 1671 and, further, that defendant knew 1 as currently alleged. Plaintiffs’ conclusion that the late fees assessed under the Loan 2 Agreements are illegal is a legal conclusion, i.e., the fees are illegal under section 1671. 3 There is no factual allegation that defendant shared their view that the late fees were in 4 fact illegal and defendant charged them anyway. Nor is it clear that defendant should 5 have known the fees were illegal. Whether a liquidated damages clause is unreasonable 6 and unenforceable under section 1671(b) requires an inquiry into whether “it bears no 7 reasonable relationship to the range of actual damages that the parties could have 8 anticipated would flow from a breach.” Greentree Fin. Grp., Inc. v. Execute Sports, Inc., 9 163 Cal. App. 4th 495, 499 (Ct. App. 2008) (quoting Ridgley v. Topa Thrift & Loan Ass’n, 10 17 Cal. 4th 970, 977(1998)). This is not to say that the liquidated damages clause in 11 question was enforceable; plaintiffs may well prevail on that legal issue as this litigation 12 progresses. The point here is that reasonable minds can disagree whether a liquidated 13 damages clause is enforceable. Thus, it is difficult to subscribe fraud or negligent 14 misrepresentation to one party concerning this disagreement absent specific factual 15 allegations to the contrary, as required by Rule 9(b). The court does not discount that 16 such allegations could be pled by plaintiffs, but they have not done so in the SAC. 17 For the foregoing reasons, plaintiffs’ third claim for fraud and fourth claim for 18 negligent misrepresentation are DISMISSED WITH LEAVE TO AMEND. 19 3. Fifth Claim: Unfair Competition 20 Plaintiffs’ fifth cause of action is for a violation of California’s unfair competition law 21 (“UCL”). The UCL creates a cause of action for business practices that are (1) unlawful, 22 (2) unfair, or (3) fraudulent. Cal. Bus. & Prof. Code § 17200. Each “prong of the UCL 23 [provides] a separate and distinct theory of liability.” Lozano v. AT & T Wireless Servs., 24 Inc., 504 F.3d 718, 731 (9th Cir. 2007); see also Imax Corp. v. Cinema Techs., Inc., 152 25 F.3d 1161, 1169 (9th Cir. 1998) (discussing common law unfair competition). 26 Defendant argues that plaintiffs cannot meet any of the three prongs. With regard 27 to the unlawful prong, defendant contends that plaintiffs cannot state a claim under the 1 Plaintiffs respond that their breach of contract claim is premised on defendant’s violation 2 of Civil Code § 1671. Opp. at 16. With respect to the unfair prong, defendant asserts 3 that plaintiffs have not alleged a violation of antitrust law or that the claims are tethered to 4 an underlying constitutional, statutory, or regulatory provision. Mtn. at 16. Plaintiffs 5 respond that there are several tests articulated by California courts that may be 6 applicable and because defendant does not address those tests, they are unable to 7 respond effectively. Opp. at 17. They also argue that asserting a contractual right that 8 one does not have may constitute an unfair business practice. Id. at 18. Finally, as to 9 the fraud prong, defendant argues plaintiffs have failed to plead fraud with particularity. 10 Mtn. at 16. Plaintiffs argue that the fraud prong only requires a showing that a plaintiff 11 was likely to be deceived and suffered economic injury as a result of the deception. Opp. 12 at 19–20. 13 In a case cited by defendant, Shroyer v. New Cingular Wireless Services, Inc., the 14 Ninth Circuit noted that a violation of the unlawful prong of § 17200 requires plaintiffs to 15 allege that they were “engaged in a business practice ‘forbidden by law, be it civil or 16 criminal, federal, state, or municipal, statutory, regulatory, or court-made.’” 622 F.3d 17 1035, 1044 (9th Cir. 2010) (quoting Saunders v. Superior Court, 27 Cal. App. 4th 832, 18 838–39 (Ct. App. 1994)). The court stated, “a common law violation such as breach of 19 contract is insufficient.” Id. In making that statement, the court cited National Rural 20 Telecommunications Co-op. v. DIRECTV, Inc., which in turn noted that a breach of 21 contract may form the predicate for a section 17200 claim, “provided it also constitutes 22 conduct that is ‘unlawful, or unfair, or fraudulent.’” 319 F. Supp. 2d 1059, 1074–75 (C.D. 23 Cal. 2003) (quoting Watson Labs. Inc. v. Rhone–Poulenc Rorer, Inc., 178 F. Supp. 2d 24 1099, 1117 n.12 (C.D. Cal. 2001)). 25 Applying here, plaintiffs allege defendant violated a statutory provision, California 26 Civil Code § 1671, and because of that violation, breached the contract. SAC ¶ 24. The 27 statutory violation is a necessary predicate to the common law breach of contract claim 1 a claim for breach of the unlawful provision of § 17200.3 2 That conclusion does not resolve plaintiffs’ claim, however, because they seek 3 damages under section 17200. Id. ¶ 35. “The UCL limits the remedies available for UCL 4 violations to restitution and injunctive relief . . . .” Madrid v. Perot Sys. Corp., 130 Cal. 5 App. 4th 440, 452 (Ct. App. 2005). In their opposition, plaintiffs concede that they cannot 6 seek damages under the UCL and seek the opportunity to replead their complaint for 7 restitution rather than damages. Opp. at 21. The court agrees that plaintiffs cannot seek 8 damages under the UCL and plaintiffs’ fifth cause of action fails to state a claim for that 9 reason. 10 Plaintiffs indicate that they intend to replead their complaint seeking restitution 11 rather than damages. That assertion merits further discussion.

12 Restitution under [Business and Professions Code] section 17203 is confined to restoration of any interest in money or 13 property, real or personal, which may have been acquired by means of such unfair competition. A restitution order against a 14 defendant thus requires both that money or property have been lost by a plaintiff, on the one hand, and that it have been 15 acquired by a defendant, on the other. [C]ompensatory damages are not recoverable as restitution. 16 17 Zhang v. Superior Court, 57 Cal. 4th 364, 371 (2013) (alterations in original) (internal 18 quotation marks and citations omitted). As the foregoing passage demonstrates, 19 plaintiffs will need to allege specific money or property that defendant acquired from 20 plaintiffs in order to seek restitution. Broadly speaking, the SAC alleges that plaintiffs 21 paid to defendant certain fees and penalties pursuant to contracts entered into by the 22 parties. Generally, the UCL “is not an all-purpose substitute for a tort or contract action.” 23 Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1150 (2003) (quoting 24 Cortez v. Purolater Air Filtration Prods. Co., 23 Cal. 4th 163, 173 (2000)). It may be the 25 case that plaintiffs can sufficiently allege conduct warranting application of the equitable 26 3 The court does not foreclose the fact that plaintiffs may also state a claim under the 27 other prongs of the UCL. Because plaintiffs simultaneously state a claim under the 1 remedies provided for by the UCL, but as currently alleged, this appears to be a contract 2 action for which compensatory damages are the appropriate relief (should plaintiffs 3 prevail on their breach of contract claim). 4 For the foregoing reasons, plaintiffs’ fifth claim for unfair competition is 5 DISMISSED WITH LEAVE TO AMEND. 6 4. Sixth and Seventh Claims: Punitive Damages and Attorneys’ Fees 7 Plaintiffs’ sixth and seventh claims are for punitive damages and attorneys’ fees. 8 Defendant contends that neither punitive damages nor attorneys’ fees are causes of 9 action (Mtn. at 17) and plaintiffs concede that their claims can be recharacterized as 10 remedies (Opp. at 22). As defendant points out, both punitive damages and attorneys’ 11 fees are not causes of action, rather they are remedies. See Locuspoint Networks, LLC 12 v. D.T.V. LLC, No. 14-CV-01278-JSC, 2015 WL 2398168, at *6 (N.D. Cal. May 19, 2015); 13 Oppenheimer v. Sw. Airlines Co., No. 13-CV-260-IEG BGS, 2013 WL 3149483, at *3 14 (S.D. Cal. June 17, 2013). Plaintiffs have already included both punitive damages and 15 attorneys’ fees in their prayer for relief and may continue to pursue these to the extent 16 they are supported by plaintiffs’ underlying claims. 17 For the foregoing reasons, plaintiffs’ sixth and seventh claims are DISMISSED 18 WITH PREJUDICE. 19 CONCLUSION 20 For the foregoing reasons, defendant’s motion to dismiss plaintiffs’ second cause 21 of action for breach of the covenant of good faith and fair dealing is GRANTED IN PART 22 AND DENIED IN PART, and, to the extent it is granted, the claim is DISMISSED WITH 23 PREJUDICE as discussed herein; defendant’s motion to dismiss plaintiffs’ third cause of 24 action for fraud is GRANTED, and the claim is DISMISSED WITH LEAVE TO AMEND; 25 defendant’s motion to dismiss plaintiffs’ fourth cause of action for negligent 26 misrepresentation is GRANTED, and the claim is DISMISSED WITH LEAVE TO AMEND; 27 defendant’s motion to dismiss plaintiffs’ fifth cause of action for unfair competition is 1 to dismiss plaintiffs’ sixth cause of action for punitive damages is GRANTED, and the 2 claim is DISMISSED WITH PREJUDICE; and defendant’s motion to dismiss plaintiffs’ 3 seventh cause of action for attorneys’ fees is GRANTED, and the claim is DISMISSED 4 WITH PREJUDICE. 5 The court notes that, pursuant to stipulations between the parties, plaintiffs have 6 already had two opportunities to amend their complaint. Given the failure to adequately 7 state a claim after two such opportunities, the court is skeptical that plaintiffs can state a 8 claim for those causes of action dismissed with leave to amend. However, because this 9 is the first instance the court has reviewed the complaint, it is not clear that further 10 amendment is futile. Accordingly, plaintiffs may file an amended complaint, if any, within 11 21 days of the date of this order. No new parties or causes of action may be pleaded 12 without leave of court or the agreement of defendant. 13 IT IS SO ORDERED. 14 Dated: July 9, 2020 15 /s/ Phyllis J. Hamilton PHYLLIS J. HAMILTON 16 United States District Judge

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