DERRICK K. WATSON, District Judge.
Cumis Insurance Society, as subrogee, seeks to recover from Vallatini the claims paid to its insured and Vallatini's employer, Kauai Government Employee's Federal Credit Union ("KGE"), as a result of Vallatini's allegedly fraudulent lending practices. Vallatini moves to dismiss the breach of implied contract claim asserted in Count III. The First Amended Complaint ("FAC"), however, adequately states a claim for breach of implied contract based upon Vallatini's implied obligation, as a condition of his continued employment with KGE, that he would "comply with company policy regarding approval of loans to borrowers and selling repossessed vehicles to the highest bidder." FAC ¶ 18. KGE performed under the implied-in-fact contract, while Vallatini, allegedly, did not. Because Cumis, as subrogee, alleges it suffered pecuniary losses when it paid claims under the fidelity bond to KGE, which were a reasonably foreseeable consequence of Vallatini's breach, Cumis may seek to recover these losses as an available breach of contract remedy. Accordingly, the Court DENIES Vallatini's Motion to Dismiss Count III for failure to state a claim and his alternative request to bar Cumis from seeking monetary damages on its breach of implied contract claim.
Cumis provides insurance products, including fidelity bonds, to federal credit unions. FAC ¶ 1, Dkt. No. 29. Cumis issued a fidelity bond to KGE providing coverage for losses incurred as a result of fraudulent or dishonest acts by specified individuals, including Vallatini. FAC ¶ 5. Vallatini was employed by KGE as a Senior Loan Manager, FAC ¶ 2, and his allegedly fraudulent acts committed "between 2008-2014 in approving loans for various members of the Credit Union," resulted in Cumis "making payments under the fidelity bond, which now forms the basis of this lawsuit," FAC ¶ 6.
On August 21, 2014, KGE notified Cumis of its claims under the fidelity bond, seeking repayment of losses incurred when borrowers defaulted on loans improperly approved by Vallatini. According to Cumis, in approving loans to certain borrowers in violation of KGE policies, Vallatini "knowingly and intentionally misrepresented that various members were qualified borrowers when in fact, they were not[.]" FAC ¶ 6. As a result of KGE's claim on the bond, Cumis alleges it "became obligated to pay the Credit Union sums in excess of this court's minimum jurisdiction, and Cumis has since become subrogated to the rights of, and stands in the shoes of the Credit Union to pursue Defendant Vallatini and any other responsible third party for reimbursement of this amount[.]" FAC ¶ 7.
Following dismissal of the prior complaint with leave to amend, Dkt. No. 26, Cumis, as subrogee of KGE, alleges three causes of actions against Vallatini: (1) fraudulent misrepresentation (Count I); (2) negligent misrepresentation (Count II); and (3) breach of implied contract (Count III).
FAC ¶ 18. Cumis further asserts that KGE performed its obligations under the implied contract by continuing to employ and pay compensation to Vallatini, FAC ¶¶ 19-20. However, "each of the misrepresentations made by Defendant to the Credit Union as set forth in [the FAC] constitute a failure to perform under the implied contract, and said failures to perform were not excused." FAC ¶ 21. Cumis contends that as "the subrogated insurer of the Credit Union [it] stands in the shoes of its insured, and thus has privity of contract with Defendant [Vallatini]." FAC ¶ 22.
Vallatini maintains that Cumis fails to sufficiently allege the existence of an implied contract between himself and KGE in the at-will employment context.
Federal Rule of Civil Procedure 12(b)(6) authorizes the Court to dismiss a complaint that fails "to state a claim upon which relief can be granted." Rule 12(b)(6) is read in conjunction with Rule 8(a), which requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The Court may dismiss a complaint either because it lacks a cognizable legal theory or because it lacks sufficient factual allegations to support a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). Pursuant to Ashcroft v. Iqbal, "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" 555 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 554, 570 (2007)).
A court may consider certain documents attached to a complaint, as well as documents incorporated by reference in the complaint, or matters of judicial notice, without converting a Rule 12(b)(6) motion to dismiss into a motion for summary judgment. United States v. Ritchie, 342 F.3d 903, 908-09 (9th Cir. 2003); Fed. R. Evid. 201(b); Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001).
Cumis adequately states a claim for breach of an implied contract based upon Vallatini's implied obligation, as a condition of his continued employment with KGE, that he would "comply with company policy regarding approval of loans to borrowers and selling repossessed vehicles to the highest bidder." FAC ¶ 18. KGE performed under the implied-in-fact contract, while Vallatini, allegedly, did not. Because Cumis, as subrogee, alleges it suffered pecuniary losses when it paid claims under the bond to KGE, the Court determines that Count III sufficiently states a breach of implied contract claim against Vallatini, and that Cumis may seek available remedies for breach of contract.
Cumis sufficiently alleges the elements of a claim for breach of an implied contract between Vallatini and KGE. To state such a claim, a plaintiff must allege the breach of "an agreement in fact," which is not express but "is implied or presumed" based upon the actions of the parties. Kemp v. State of Hawaii Child Support Enforcement Agency, 111 Haw. 367, 391, 141 P.3d 1014, 1038 (2006); see also Durette v. Aloha Plastic Recycling, Inc., 105 Haw. 490, 504, 100 P.3d 60, 74 (2004) (Under Hawaii law, an implied contract can be found where the intentions of the parties are not expressed, "but an agreement in fact, creating an obligation, is implied or presumed from their acts.") (citation omitted); Davis v. Four Seasons Hotel Ltd., No. CIV. 08-00525-HG-LEK, 2010 WL 3946428, at *14 (D. Haw. Sept. 30, 2010).
Cumis adequately alleges consideration "in the form of employment and compensation in exchange for the implied promises," FAC ¶ 19, "whereby Defendant agreed not to misrepresent information to the Credit Union regarding borrowers' qualification for loans, not to grant preferential treatment to any borrower, to properly record security interests in any collateral, [and] to act in good faith [with] respect to []his duties as Senior Loan Manager." FAC ¶ 18.
Vallatini argues that Cumis' implied-in-fact contract allegations are insufficient in the at-will employment context because the FAC "does not allege any qualifying statements or actions by either party that would modify the relationship between KGE and Defendant from an employment-at-will relationship to something more." Mem. in Supp. at 5, Dkt. No. 30-1. Vallatini is mistaken. To the extent the wrongful termination cases he relies upon are even supportive of his argument in this insurance subrogation matter,
In sum, Cumis sufficiently alleges that Vallatini breached an implied contract with KGE that he would "comply with company policy regarding approval of loans to borrowers and selling repossessed vehicles to the highest bidder, among other things." FAC ¶ 18. Assuming the allegations in the FAC are true, it is plausible that a jury could find that an implied-in-fact contract existed between KGE and Vallatini that created an obligation on the part of Vallatini to comply with particular KGE company policies. Based upon the allegation that Cumis has valid rights as subrogee to stand in the shoes of KGE, whom Cumis alleges performed its obligations under the implied contract, FAC ¶ 20-22, the Court determines that Count III sufficiently states a breach of implied contract claim against Vallatini.
Vallatini alternatively argues that "even if an implied contract existed between KGE and Defendant wherein Defendant agreed not to misrepresent information to KGE, the remedy for any alleged breach of an implied employment contract by Defendant is termination." Mem. in Supp. at 5. The remedy, Vallatini asserts, is limited to termination. Vallatini, however, provides no legal authority in support of this assertion. Instead, he recites the bedrock standard applicable to the recovery of actual damages in contract actions: "[c]ontract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time; consequential damages beyond the expectations of the parties are not recoverable." See Mem. in Supp. at 5-6 (quoting Francis v. Lee Enters., Inc., 89 Haw. 234, 239-40, 971 P.2d 707, 712-13 (1999)) (contrasting the different types of damages awarded in tort and in contract actions) (quoting Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal.4th 85, 44 Cal.Rptr.2d 420, 900 P.2d 669, 682 (Cal. 1995)).
Indeed, damages for breach of contract—whether the contract is express or implied—must be reasonably foreseeable in accordance with the parties' expectations. That is because damages for breach of contract are designed to make the non-breaching party whole. Under well-established Hawaii law, "`when one sustains a loss by breach of a contract, he [or she] is entitled to have just compensation commensurate with his [or her] loss' and `that damages awarded should be in such amount as will actually or as precisely as possible compensate the injured party.'" Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw. 85, 128, 839 P.2d 10, 32 (1992) (quoting Ferreira v. Honolulu Star-Bulletin, Ltd., 44 Haw. 567, 573-74, 356 P.2d 651, 655, reh'g denied, 44 Haw. 581, 357 P.2d 112 (1960)).
Here, the non-breaching party may properly seek to recover its compensatory damages—characterized in the FAC as "reimbursement"—for actual losses sustained as a result of Defendant's alleged breach. See Amfac, Inc., 74 Haw. at 128, 839 P.2d at 32 (the non-breaching party "is entitled to have just compensation commensurate with [its] loss" and "damages awarded should be in such amount as will actually or as precisely as possible compensate the injured party") (citation and internal quotation marks omitted)). The claimed losses sustained by Cumis and its insured, KGE, are reasonably foreseeable damages that flow from the type of breach attributed to Vallatini. See Bow v. Nakamura, 6 Haw.App. 290, 293, 719 P.2d 1103, 1106 (1986) (explaining that "damages can be recovered as are the natural and proximate consequence of its breach . . . direct damages flowing from the breach are always recoverable").
For the foregoing reasons, Vallatini's Motion to Dismiss Count III, Dkt. No. 30, is DENIED.
IT IS SO ORDERED.
Clemmons, 836 F. Supp. 2d at 1142-43. The preceding discussion illustrates the subtle distinction between cases initiated by terminated employees seeking to gain the benefit of an implied-in-fact contract against an at-will employer on the one hand, and cases brought by a defrauded employer seeking to recover losses incurred from an employee who breached company policies during the course of employment, on the other. Neither party here appears to assert that Vallatini was anything other than an at-will employee.
