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Nucal Foods, Inc v. Quality Egg LLC; et al

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA


January 14, 2013

NUCAL FOODS, INC., PLAINTIFF,
v.
QUALITY EGG LLC; ET AL., DEFENDANTS.

ORDER

This matter comes before the court on defendant Quality Egg's motion to dismiss four of five cross claims brought by co-defendant Hillandale Farms of Iowa, Inc. ("Hillandale"). (ECF 125.) This motion was decided without a hearing. For the following reasons, Quality Egg's motion to dismiss is DENIED in part and GRANTED in part.

I. PROCEDURAL HISTORY AND ALLEGED FACTS This case arises out of a massive recall in August 2010 of shell eggs precipitated

by an outbreak of salmonella enteritidis ("SE") that sickened as many as 62,000 people. (First Am. Compl. ¶ 1) ("FAC"). Plaintiff NuCal filed its initial complaint on November 18, 2010, alleging seven causes of action against three defendants, Quality Egg LLC ("Quality Egg"), Wright County Egg, and Hillandale Farms. (ECF 1.) The court granted plaintiff's motion to amend on January 27, 2012 (ECF 60) and plaintiff filed its amended complaint on January 30, 2012 (ECF 61).

The amended complaint names eight defendants ("defendants") - Quality Egg, DeCoster Revocable Trust ("DeCoster Trust"), Austin "Jack" DeCoster, DeCoster Enterprises LLC ("DeCoster Enterprises"), Environ/Wright County Inc. ("Environ"), Hillandale Farms, Hillandale LLC, and Hillandale PA - and alleges eight causes of action: 1) breach of implied warranty of merchantability against Quality Egg, DeCoster Trust, Jack DeCoster, DeCoster Enterprises, Environ, and Hillandale PA; 2) breach of implied warranty of fitness for particular purpose against Quality Egg, DeCoster Trust, Jack DeCoster, DeCoster Enterprises, Environ, and Hillandale PA; 3) breach of express warranty against Quality Egg, DeCoster Trust, Jack DeCoster, DeCoster Enterprises, Environ, and Hillandale PA; 4) fraud against all defendants;

5) negligence against all defendants; 6) equitable indemnification against all defendants;

7) negligent interference with prospective economic advantage against all defendants; and

8) unfair competition.*fn1 On August 15, 2012, defendants Jack DeCoster, DeCoster Trust, DeCoster Enterprises, and Environ/Wright County were dismissed from this action for lack of personal jurisdiction. (ECF 156.) The remaining defendants are the three Hillandale entities and Quality Egg.

On February 29, 2012, defendant Hillandale Farms of Iowa, Inc. ("Hillandale") filed a cross-claim against co-defendant Quality Egg. (ECF 67.) Hillandale alleged five causes of action: 1) equitable indemnity; 2) breach of implied warranty of merchantability; 3) breach of implied warranty of fitness for a particular purpose; 4) contribution; and 5) apportionment. The motion addressed by this order is Quality Egg's motion to dismiss all but the merchantability claim.

At all times relevant to this action, plaintiff NuCal purchased eggs from defendants through a commercial exchange called "Egg Clearinghouse, Inc." ("ECI"). (Id. ¶79.) Plaintiff alleges that defendants became aware of a heightened risk of SE contamination at defendant's farms in early 2010. (Id. ¶ 6.) Plaintiff further alleges that defendants had actual knowledge, no later than March 2010, that many of their chicken houses were contaminated with SE, and that by June 2010, their hens also had tested positive for SE. (Id. ¶¶ 5, 7.) Plaintiff avers that despite this knowledge, defendants continued to sell plaintiff eggs from contaminated farms without warning plaintiff or regulators and without conducting tests on eggs from contaminated farms. (Id. ¶ 9.)

On July 9, 2010, new federal egg safety rules took effect. (Id. ¶ 13.) These rules require SE positive farms to divert eggs to other facilities or to keep them out of the market until tests confirm they are contamination free. (Id.) Plaintiff alleges defendants, through omissions and misrepresentations, failed to comply with these new rules; for example, defendants represented they would notify plaintiff of any SE positive environmental tests involving farms that produced eggs plaintiff purchased. (Id. ¶¶ 156-157.) Plaintiff alleges defendants acted upon defendants' knowledge of the SE positive tests only when the FDA stepped in. (Id. ¶ 15.) Defendants then tested eggs produced at their farms and discovered about 170 SE-infected eggs. (Id. ¶ 16.) Defendants finally instituted a recall in August 2010. (Id. ¶ 1.) Before, during and after the recall, defendants allegedly obfuscated and failed to cooperate fully with the FDA and with the U.S. House of Representatives' inquiry into the SE outbreak. (Id. ¶¶ 15, 17.)

In defendant Hillandale's cross-claim against Quality Egg, Hillandale alleges it procured the allegedly contaminated eggs it sold to plaintiff from Quality Egg's farms. (ECF 67 at 37.) Hillandale further alleges it learned of Quality Egg's involvement in a potential SE outbreak only in mid-August 2010. (Id.) Prior to this time, Hillandale alleges it had no knowledge of any SE-positive test results at the Quality Egg facility from which it received its eggs. (Id. at 38.) Hillandale alleges that Quality Egg owned and managed the farm and all related production articles, including the hens and pullets. (Id. at 38-39.) Any processing Hillandale may have conducted on these Quality Egg eggs related solely to the outside of the eggs, Hillandale alleges; therefore, because the SE contamination was found inside the eggs, not on the shell, any contamination was caused by Quality Egg. (Id.)

II. STANDARD

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for "failure to state a claim upon which relief can be granted." A court may dismiss "based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

Although a complaint need contain only "a short and plain statement of the claim showing that the pleader is entitled to relief," FED. R. CIV. P. 8(a)(2), in order to survive a motion to dismiss this short and plain statement "must contain sufficient factual matter . . . to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something more than "an unadorned, the-defendant-unlawfully-harmed-me accusation" or "'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action . . . .'"

Id. (quoting Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss for failure to state a claim is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. Ultimately, the inquiry focuses on the interplay between the factual allegations of the complaint and the dispositive issues of law in the action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).

In making this context-specific evaluation, this court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). This rule does not apply to "'a legal conclusion couched as a factual allegation,'" Papasan v. Allain, 478 U.S. 265, 286 (1986) (quoted in Twombly, 550 U.S. at 555), nor to "allegations that contradict matters properly subject to judicial notice" or to material attached to or incorporated by reference into the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). A court's consideration of documents attached to a complaint or incorporated by reference or matter of judicial notice will not convert a motion to dismiss into a motion for summary judgment. United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003).

III. APPLICATION

Quality Egg makes two primary arguments in its motion to dismiss. First, it avers

Hillandale's three loss-sharing claims (equitable indemnity, contribution, and apportionment) should be dismissed wholly or in part because they are not ripe, are duplicative, and are partly premised upon non-tortious conduct. (Quality Egg Mot. to Dismiss at 4-7, ECF 125.) Second, Quality egg asserts Hillandale has failed to plead facts necessary to sustain its implied warranty of fitness claim. (Id. at 7-9.)

A. Loss-Sharing Claims

1. Ripeness

Quality Egg argues Hillandale's three loss-sharing claims are not ripe because Hillandale has not been found liable and has not paid plaintiff damages. (ECF 125 at 4.) Quality Egg cites a state appellate court case, Major Clients Agency v. Diemer, 67 Cal. App. 4th 1116, 1131 (Cal. Ct. App. 1988), which sustained a demurrer on a cross-claim for equitable indemnity that did not plead that a liability had been discharged that the other party should pay. (Id.) Hillandale contends ripeness is not an issue as to its equitable indemnity claim, but does not address Quality Egg's ripeness arguments as to the contribution and apportionment claims. (ECF 144 at 3-5.) Citing the state Supreme Court case of Evangelatos v. Superior Court, 44 Cal. 3d 1188, 1197-98 (Cal. 1988), Hillandale asserts a defendant may pursue an equitable indemnity claim either by filing a cross-complaint or by filing a separate indemnity action after it has paid damages for which another is responsible. (Id.)

The parties' cited cases appear to contradict one another. A defendant could never plead an equitable indemnity claim in a cross-complaint if that claim did not exist until the underlying action had reached a final judgment. See, e.g., E.L. White, Inc. v. City of Huntington Beach, 21 Cal. 3d 497, 506 (Cal. 1978) ("It is well settled that a cause of action for implied indemnity does not accrue or come into existence until the indemnitee has suffered actual loss through payment.").However, the court in E.L. White, on which Major Client relies, was considering whether an equitable indemnity claim was barred by the statute of limitations when it made the statement about when such claims come into existence. 21 Cal. 3d at 506. For the purposes of equitable tolling, then, an equitable indemnity claim does not "exist" until a party has paid damages for which another is responsible. The equitable indemnity claim in Major Client could not lie because there was no concurrent liability among defendants, 67 Cal. App. 4th at 1131, not because it was prematurely pled. The other cases Quality Egg cites for its ripeness proposition also rely upon E.L. White, supra, and other cases that discuss this remedy's existence in the context of the statute of limitations. See, e.g., Christian v. County of Los Angeles, 176 Cal. App. 3d 466, 471 (Cal. Ct. App. 1986) (citing E.L. White and People ex.rel. Dep't of Transp. v. Superior Court, 26 Cal. 3d 744, 759 (Cal. 1980)). Department of Transportation makes clear that E.L. White relates to the statute of limitations. 26 Cal.3d at 751. Taken together, Department of Transportation and Evangelatos, both California Supreme Court cases, suggest equitable indemnity claims may be pled in a cross-complaint before any defendant has been found liable.Hence, the weight of California Supreme Court case law comports with a common sense understanding of the nature and function of cross-complaints and indemnity.

The court thus finds that Hillandale's equitable indemnity, contribution, and apportionment claims are not barred for ripeness. Although in its opposition Hillandale does not address ripeness as to its contribution and apportionment claims, Quality Egg has cited no cases specific to these two defenses. Quality Egg simply lumped these two claims together with equitable indemnity. As the equitable indemnity claim may proceed on ripeness, the court also will allow the other two claims to proceed. California courts in fact countenance cross-complaints containing such claims when the underlying action is still pending. See, e.g., Coca-Cola Bottling Co. v. Lucky Stores, Inc., 14 Cal. Rptr. 2d 673, 674-75 (Cal. Ct. App. 1992) (finding no fault with the state court entertaining a cross-complaint containing equitable indemnity and contribution claims and a request for declaratory judgment of fault).

2. Duplication

Hillandale's equitable indemnity and contribution claims are not duplicative of each other. Each serves a different function. As previously mentioned, the trial court that heard the underlying action on appeal in Coca-Cola Bottling Co., 14 Cal. Rptr. 2d at 674-75, allowed a cross-complaint containing both claims to proceed. The appeals court there, finding no fault with the trial court, spoke to the distinction between equitable indemnity and contribution, noting that the former distributes the entire loss upon one or more tortfeasors according to fault while the latter, a creature of statute, distributes the loss equally among all tortfeasors. Id. at 676. However, the court also noted that the two claims are mutually exclusive: "Where a right of indemnity exists there can be no contribution." Id. at 677. This does not bar Hillandale's claims; it may plead in the alternative. FED. R. CIV. P. 8(d)(3).

Hillandale's apportionment claim is duplicative of its equitable indemnity claim, however. Apportionment is a doctrine relating to the distribution of liability among joint tortfeasors. 5 BERNARD. E. WITKIN, SUMMARY OF CALIFORNIA LAW § 51, at 118 (10th ed. 2005). As such, it is subsumed into equitable indemnity, which determines the relative fault of each tortfeasor and then additionally requires each to pay in that proportion, Coca-Cola Bottling Co., 14 Cal. Rptr. 2d at 674-75. Hillandale cites no cases in its opposition suggesting there is a distinction between the two, or even that apportionment is a claim at all, rather than just a doctrine. For these reasons, Hillandale's apportionment claim is dismissed.

Accordingly, Hillandale's equitable indemnity and contribution claims may proceed, while its apportionment claim is dismissed.

3. Premised Upon Non-Tortious Conduct

Quality Egg avers Hillandale may base its equitable indemnity claim only on underlying tort liability. (ECF 125 at 7.) Inasmuch as Hillandale seeks equitable indemnification from Quality Egg, it can only receive indemnification based upon shared fault for the tortious conduct, not for breach of contract remedies such as implied warranties. (Id.) Hillandale counters that equitable indemnification can also extend to contractual remedies. (ECF 144 at 7.) Quality Egg does not address this argument in its reply.

Hillandale may seek equitable indemnity on both tort and contract claims. Implied contractual indemnity is a cognizable type of equitable indemnity allowing recovery for failure to perform. WITKIN, supra, SUMMARY OF CALIFORNIA LAW § 118, at 220; Bay

Development, Ltd. v. Superior Court, 50 Cal. 3d 1012, 1032 (Cal. 1990).

Therefore, if Hillandale is found liable in the underlying action, it may seek appropriate loss-sharing relief from Quality Egg through equitable indemnity and, in the alternative, through contribution.

B. Implied Warranties

Quality Egg argues Hillandale does not allege the necessary elements of an implied warranty of fitness claim. (ECF 125 at 8-9.) Hillandale does not counter this argument in its opposition. Instead, recognizing plaintiff NuCal makes the same implied warranty claim against all defendants in the underlying action, based upon nearly identical alleged facts, Hillandale urges this court to allow its implied warranty of fitness claim to proceed only if it allows plaintiff's to proceed. (ECF 144 at 2 n.1.) The court dismisses Hillandale's implied warranty of fitness claim for the same reason it dismisses plaintiff's, as described below.

The warranty of fitness for a particular purpose is implied by law when "a seller has reason to know that a buyer wishes goods for a particular purpose and is relying on the seller's skill and judgment to furnish those goods." Martinez v. Matabolife Int'l, Inc., 6 Cal. Rptr. 3d 494, 189 (Cal. Ct. App. 2003). This warranty is breached when the goods are not reasonably fit for the intended purpose, causing injury. Id. The crux of the issue here is whether Hillandale purchased eggs from Quality Egg for a "particular purpose" such that it relied on Quality Egg's skill. Comment 2 to the relevant California statutory provision states:

A "particular purpose" differs from the ordinary purpose for which the goods are used in that it envisages a specific use by the buyer which is peculiar to the nature of his business whereas the ordinary purposes for which goods are used are those envisaged in the concept of merchantability and go to uses which are customarily made of the goods in question. For example, shoes are generally used for the purpose of walking upon ordinary ground, but a seller may know that a particular pair was selected to be used for climbing mountains.

CAL. COMM. CODE § 2315. This comment also instructs that a contract may include an implied warranty both of merchantability and of fitness for a particular purpose. Id.

Quality Egg's implied warranty of fitness claim is inadequately pled. Eggs such as those at issue here are ordinarily used for human consumption, whether as a processed and pasteurized liquid or as unbroken shell eggs. Quality Egg does not allege, nor could the court accept, that buying eggs to be repackaged and sold to consumers as unbroken shell eggs is "peculiar to the nature" of its business. See, e.g., Mathison v. Bumbo, No. SA CV08--0369 DOC (Anx), 2008 WL 8797937, at *11 (C.D. Cal. Aug. 18, 2008) ("There is nothing peculiar about using a baby seat to secure infants and toddlers." (internal quotations omitted)). Rather, the ordinary purpose of such eggs repackaged for resale is envisaged in the concept of general merchantability. Thus, Quality Egg's implied warranty of fitness claim is dismissed.

C. Leave to Amend

Courts should consider four factors when considering leave to amend: 1) undue

delay; 2) bad faith; 3) futility of amendment; and 4) prejudice to the opposing party. Levine v. Safeguard Health Enterprises, Inc., 32 F. App'x 276, 278 (9th Cir. 2002) (internal citations and quotations omitted). In this order, the court dismisses Hillandale's apportionment claim and its implied warranty of fitness claim.

This case has been pending for more than two years, but there is no indication the parties have shown bad faith. Moreover, Quality Egg would not be unduly prejudiced if Hillandale were given leave to amend. However, the court finds the third futility factor weighs most heavily here: given the court's reasons for dismissing each of these claims, set forth above, amendment would be futile. No amount of additional pleading could resurrect Hillandale's apportionment claim, which, even if it were viable, would be duplicative. There also are no facts Hillandale could plead that would satisfy the relevant legal standard for implied warranty of fitness. The court denies leave to amend these claims.

III. CONCLUSION

For the foregoing reasons, Quality Egg's motion to dismiss is DENIED in part and

GRANTED in part, as follows:

1. Hillandale's apportionment claim (claim V) is dismissed with prejudice; and

2. Hillandale's implied warranty of fitness claim (claim III) is dismissed with prejudice.

The court further ORDERS that: 1. Hillandale file amended pleadings consistent with this order by February 15, 2013; and

2. The status conference set for February 21, 2013 is vacated and reset for March 7, 2013.

IT IS SO ORDERED.


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