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Watermark Granite La Quinta, et al v. American International Specialty Lines Insurance Company

May 23, 2011


The opinion of the court was delivered by: M. James Lorenz United States District Court Judge


In this insurance action, real estate developers and insureds Watermark Granite La Quinta, LLC and Innovative Communities, Inc. ("Plaintiffs") filed an action against their insurer, Defendant American International Specialty Lines Insurance Company, to recover insurance premiums paid in relation to two failed projects. The court has subject matter jurisdiction pursuant to 28 U.S.C. Section 1332(a)(1). Defendant filed a motion to dismiss the second amended complaint. Plaintiffs opposed and Defendant replied. For the reasons which follow, Defendant's motion is GRANTED.

According to Plaintiffs, prior to commencing construction on the projects, they obtained policies to insure the construction and sale of homes, primarily against claims of defective construction by third party purchasers. (Opp'n at 1; Second Am. Compl. ("Compl.") at 3.) They took out Policy No. BE-9745437, effective from December 10, 2004 to October 7, 2007, for the Mesa Verde project for construction of 200 residences and related infrastructure. (Compl. at 4.) They took out Policy No. BE-7412308, effective from May 1, 2005 to April 14, 2008, for the Watermark project for construction of 250 condominiums and related infrastructure. (Id. at 5.) In exchange for coverage in the aggregate amount of $10 million on each project, Defendant demanded and received from Plaintiffs Advance Premiums totaling approximately $1.3 million. . at 4 & 5.)

Due to the deteriorating real estate and credit markets, Plaintiffs' projects were not completed. (Opp'n at 1.) With respect to the Mesa Verde project, Plaintiffs completed the infrastructure work and built and sold 64 residences. (Compl. at 4.) The remaining 136 finished lots were sold to Centex Homes. (Id.) As to the Watermark project, they almost completed the infrastructure and eight model units before losing financing and the lender taking possession of the property. (Id. at 5.)

Subsequently, Plaintiffs informed Defendant that the projects did not reach the scope of construction anticipated when the insurance policies were issued. Plaintiffs maintain that the actual amount due as Advance Premium was based on Defendant's own internal formula and calculation of the risk it was assuming for the construction and sale of a specific number of homes. (Opp'n at 1; see also Compl. at 4 & 5.) They demanded that Defendant audit the premiums in light of the failed projects and return a portion of the premiums paid, representing the difference between the premiums paid and earned. (Compl. at 5 & 6.) After Defendant refused to audit the premiums or return any of them, Plaintiffs filed the instant action. (Id. at 6- Plaintiffs asserted three causes of action styled as unjust enrichment, conversion, and rescission. The unjust enrichment and rescission claims are based on the theory that the insurance policies were executed pursuant to the mutual material mistake of fact "that the homes, lots and infrastructure would be completed as planned and would require the coverage to be provided under each of the respective Policies." (Opp'n at 6; see also id. at 10; Compl. at 7.) Plaintiffs also base the claims on failure of consideration, "the parties based the entire consideration for the agreement on their mistaken belief that the number of homes provided for in the policy were actually going to be constructed and the gross sales were going to reach certain amounts. Without that happening of a future event, the policies were stripped of any true consideration." (Opp'n at 10; see also Compl. at 4.) Plaintiffs claim that they are "entitled to recover premiums that [they] paid for insurance that was never rendered because the risk of exposure never existed." (Opp'n at 2.) The conversion claim is based on the theory that Defendant wrongfully declined to return any portion of the premiums when asked by Plaintiffs. (Compl. at 8.)

Defendant moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss all three claims and strike pursuant to Rule 12(f) the request for punitive damages. A Rule 12(b)(6) motion tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is warranted under Rule 12(b)(6) where the complaint lacks a cognizable legal theory. Shroyer v. New Cingular Wireless Serv., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (internal quotation marks and citation omitted); see Neitzke v. Williams, 490 U.S. 319, 326 (1989) ("Rule 12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue of law"). Alternatively, a complaint may be dismissed where it presents a cognizable legal theory yet fails to plead essential facts under that theory. Robertson v. Dean Witter Reynolds, Inc.,749 F.2d 530, 534 (9th Cir. 1984); see also Shroyer, 622 F.3d at 1041. "In addition, to survive a motion to dismiss, a complaint must contain sufficient factual matter to state a facially plausible claim to relief." Shroyer, 622 F.3d at 1041, citing Ashcroft v. Iqbal, __ U.S. __, 129 S. Ct. 1937, 1949 (2009). In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Legal conclusions need not be taken as true merely because they are couched as factual allegations. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Similarly, "conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss." Pareto v. Fed. Deposit Ins. Corp., 139 F.3d 696, 699 (9th Cir. 1998).

Defendant argues that the unjust enrichment and rescission claims should be dismissed because Plaintiffs cannot show a mutual mistake as a matter of law. California substantive law applies in this diversity action. Intr-Plex Technol., Inc. v. Crest Group, Inc., 499 F.3d 1048, 1052 (9th Cir. 2007). California Civil Code Section 1577 defines a mistake of fact:

Mistake of fact is a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in:

1. An unconscious ignorance or forgetfulness of a fact past or present, material to the contract; or,

2. Belief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed.

Because Plaintiffs' mistake theory is based on the anticipation about how the projects would turn out in the future, there was no mistake about a past or present fact, and therefore no mistake of

Plaintiffs rely on F.P. Cutting Co. v. Peterson, 164 Cal. 44 (1912) for the proposition that mistake regarding a future event is sufficient to support unjust enrichment or rescission. F.P. Cutting holds that when a contingency, which both parties anticipated to happen after contract formation and which was expressly incorporated in the contract, does not occur, the court may reform the contract so as to conform it to the parties' mutual intent at the time of contract formation. The parties in F.P. Cutting entered into a futures contract whereby the plaintiff, a fruit and vegetable canner, sold a quantity of canned tomatoes to the defendant, a wholesale grocer. They agreed that if the price specified in the contract was higher than the price to be set by the California Fruit Canneries Association's price list at the beginning of the season, then the association's price would govern the contract. The intent was to protect the defendant from paying more for the tomatoes than the association's opening price. However, contrary to the established practice, the association did not publish a price list at the beginning of the season, although its opening prices were ascertainable from the market. The court interpreted the contract provision referencing the price list as referring to the market prices to be fixed by the association at the beginning of the season, regardless of the fact that they were not published in a price list.

F.P. Cutting is inapposite because, unlike here, the association prices were an assumption expressly included in the agreement. "Absent evidence that the existence of a future contingency . . . is an assumption of the contract . . . the defense of mistake of fact must be premised on past or present facts about which the parties are ignorant or mistaken." Mosher v. Mayacamas Corp., 215 Cal. App. 3d 1, 5 (1989). Plaintiffs do not argue that the alleged mistake is premised on a past or present fact but on Plaintiffs' future success in completing the projects. To state a claim on this basis, the future contingency must be an assumption of the contract, as was the case in F.P. Channing.

The insurance policies show that the scope of completion of Plaintiffs' projects was not an assumption. (Decl. of Sanford Kingsley Exh. A & Am. Exh. B.) Generally, a court may not consider material beyond the complaint in ruling on a Rule 12(b)(6) motion. Intri-Plex Tech., 499 F.3d at 1052; see also Fed. R. Civ. Proc. 12(d). However, the court may take judicial notice of and consider "materials incorporated into the complaint or matters of public record." Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010) (citations omitted). The doctrine of incorporation by reference includes "documents in situations where the complaint necessarily relies upon a document or the contents of the document are alleged in a complaint, the document's authenticity is not in question and there are no disputed issues as to the document's relevance." Id. (citations ...

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