Hanover Ins. Co. v. Fremont Bank

• Decision Date: 22 September 2014
• Docket Number: No. C–14–01519 DMR,C–14–01519 DMR
• Citation: 68 F.Supp.3d 1085
• Court: U.S. District Court — Northern District of California
• Parties: The Hanover Insurance Co., Plaintiff(s), v. Fremont Bank, Defendant(s).

68 F.Supp.3d 1085

The Hanover Insurance Co., Plaintiff(s)

v.Fremont Bank, Defendant(s).

No. C–14–01519 DMR

United States District Court, N.D. California.

Signed September 22, 2014

Joel M. Long, Sedgwick LLP, San Francisco, CA, for Plaintiff.

Basil S. Shiber, Allison Kop Wopschall, Miller Starr Regalia A Professional Law Corporation, Walnut Creek, CA, for Defendant.

ORDER DENYING MOTION TO DISMISS [DOCKET NO. 15]

DONNA M. RYU, United States Magistrate Judge

Before the court is a motion to dismiss filed by Defendant Fremont Bank (the “Bank”). [Docket No. 15.] The court held a hearing on the motion on July 31, 2014. For the reasons stated below and at the hearing, the motion is denied.

I. BACKGROUND

A. The Bank's Loans to Legg

The Bank made business loans to a construction contractor called Legg, Inc. Am. Compl. [Docket No. 10] at ¶ 8. Those loans were secured by collateral that included Legg's accounts receivable. Id. The Bank recorded a UCC Financing Statement with the California Secretary of State in 2005, and a continuation of the UCC Financing Statement in 2009, to perfect a security interest in the collateral. Id. ; see also Fremont Bank's Request for Judicial Notice [“FRJN,” Docket No. 18] Ex. M (UCC Financing Statements dated April 28, 2005 and October 29, 2009).¹

B. Hanover's Involvement with the Bonded Projects

Legg was involved with separate projects for (1) the City of Livermore, for an office remodel, and (2) the Burke Construction Group, Inc., for an expansion of the SDCC.² Am. Compl. at ¶ 7. Plaintiff Hanover Insurance Co. (“Hanover”) is a surety company that issued performance and payment surety bonds on behalf of Legg for the Bonded Projects. Id. at ¶ 7. Beginning in 2012, Legg experienced financial difficulties and was unable to complete the Bonded Projects or pay subcontractors, suppliers, and laborers on the Bonded Projects. Id. at ¶ 9. Hanover, in satisfaction of its bonded obligations, coordinated the completion of the Bonded Projects and paid the valid claims of subcontractors, suppliers, and laborers on the Bonded Projects. Id. at ¶ 10.

To complete the Livermore Project, Hanover incurred costs of over $410,000, including payments to subcontractors, suppliers, and laborers. Id. at ¶ 11. At the time of its performance, the City of Livermore (the “City”) was holding $187,956 to pay Legg for its work on the Livermore Project. Id.

To complete the SDCC Project, Hanover incurred costs of $107,515, including payments to subcontractors, suppliers, and laborers. Id. at ¶ 13. Burke is holding $104,060 under Legg's contract with Burke for the SDCC Project. Id.

C. Communications From the Bank and Hanover Regarding Payment

Both Hanover and the Bank attempted to collect on Legg's debts by demanding payment directly from the City and Burke.

Prior to May 8, 2013,³ Hanover demanded that the City and Burke pay unused contract funds to Hanover. Alternatively, in the event that the City and Burke refused to pay, Hanover instructed the City and Burke not to pay the funds to anyone without Hanover's prior consent so that Hanover and the Bank could resolve their competing claims to the fund.Id. at ¶¶ 16–17.

On May 8, 2013, the Bank sent letters⁴ to the City and to Burke stating that Legg had defaulted on its obligations to the Bank. Id. at ¶ 18. The letters asserted that the Bank “is the secured creditor of the above Debtor [Legg] as to its accounts receivable.” Id. The letters also stated that “[n]o other creditor has any rights superior to Bank as to your obligation to the Debtor.” Id. (emphasis omitted). “Bank is now entitled to collect all outstanding accounts receivable....” Id . The Bank also claimed that it “has the superior right to payment of all sums due and payable to the Debtor,” and informed the City and Burke that “[y]ou may not direct payment to anyone other than Bank regardless of any correspondence to the contrary.” Id. (emphasis omitted). “Furthermore, if your company fails to pay Bank the sums due and pays the sums to any other person or entity, Bank will ... take any and all action necessary to collect the sums due, including filing a lawsuit if appropriate.” Id.

Beginning on May 21, 2013, and on multiple occasions thereafter, Hanover notified the Bank of Hanover's priority right to be paid the remaining contract funds on the Bonded Projects and requested that the Bank withdraw its payment demands, but Bank refused. Id. at ¶ 19.

D. Lawsuits in State Court

On May 14, 2013, the Bank filed a complaint in state court against Legg and the guarantors of Legg's obligations, alleging that Legg had breached its obligations under the loans from the Bank.⁵ See FRJN Ex. A (complaint in Fremont Bank v. Legg, Inc., et al., Superior Court of California, County of Alameda, Case No. RG13679527). At the time the Bank sued Legg, there were three other lawsuits pending in the same court filed by unpaid subcontractors against Legg and its sureties, including Hanover.⁶ The complaints in J.F. Shea and ABSL essentially seek payment from Legg and its sureties for work performed by and equipment provided by Legg's subcontractors. RFJN Exs. B, C. Neither party attached the complaint in Ransome .

On May 24, 2013, the Bank's case was related to the J.F. Shea and ABSL cases. FRJN Ex. E. On October 4, 2013, the Superior Court consolidated these three cases. FRJN Ex. F. By then, Hanover had been dismissed with prejudice from all three suits in which it had been named a party. See HRJN Ex. 1 (Hanover dismissed from the J.F Shea lawsuit on April 26, 2013), Ex. 2 (Hanover dismissed from the Ransome lawsuit on May 17, 2013), Ex. 3 (Hanover dismissed from the ABSL lawsuit on August 6, 2013).

On July 16, 2013, the Superior Court granted the Bank's motion for a right to attach and an order for the issuance of a writ of attachment against Legg. FRJN Ex. G. On July 9, 2013, the Court issued a writ of attachment directing the Sheriff of Alameda County to serve the writ as levying officer. FRJN Ex. H. Apparently, the writ of attachment was served by the Alameda County Sheriff on the City, because on July 26, 2013, the City served and filed a Memorandum of Garnishee with the levying officer indicating that it held funds subject to the writ of attachment and was transmitting to the Sheriff the sum of $140,168.24 pursuant to the writ of attachment, and withholding $47,787.44 for payment of a stop notice. FRJN Ex. I.

Legg did not appear in the state court action between it and the Bank, and default was entered against Legg. Following a prove-up hearing, judgment was entered against Legg and in favor of the Bank on October 22, 2013 in the amount of $1,296,678.76. FRJN Ex. K. On November 7, 2013, the Alameda County Superior Court issued its writ of execution on the judgment in favor of Fremont Bank, directing the Sheriff of Alameda County to execute on the writ. FRJN Ex. L. Pursuant to the writ of execution, the Sheriff transferred to counsel for Fremont Bank the amount of $140,156.24, which it held pursuant to the previously levied writ of attachment. Shiber Decl. [Docket No. 17] at ¶ 18, Ex. 1.

E. Allegations Related to Diversity Jurisdiction

Plaintiff alleges that this court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332(a), because there is diversity of citizenship between the parties⁷ and the amount in controversy exceeds the minimum jurisdictional amount.

F. Causes of Action

Hanover brings four causes of action for (1) declaratory judgment that Hanover's right to recover any remaining contract funds on the Bonded Projects is superior to the right that the Bank may have to the funds; (2) conversion, based on the Bank's procurement of the $140,156 in contract funds that should have been paid to Hanover; (3) intentional interference with contractual relations, based on the Bank inducing and accepting payment from the City of the $140,156 in contract funds that the City was contractually obligated to pay to Hanover; and (4) money had and received, because the Bank has received $140,156 in contract funds on the Livermore Project belonging to Hanover.

The only claim that relates to the SDCC Project is the one for declaratory judgment. The Bank avers that funds held by Burke for the SDCC Project have not been the subject of any state court action, and that the Bank has not made any effort to attach or levy such funds. Shiber Decl. [Docket No. 17] at ¶ 19. Furthermore, “if this action is dismissed by this Court, Fremont Bank will disclaim any right, interest, or claim in and to said funds ... [but][i]f the action is not dismissed, Fremont Bank reserves all such rights, interests, and claims.” Id.

G. Motion to Dismiss

In the instant motion, the Bank first argues that the Amended Complaint should be dismissed because it is a SLAPP action.⁸ See Cal.Code Civ. Proc. § 425.16. In the alternative, the Bank argues that the court should decline to exercise jurisdiction over Hanover's claims because of prudential considerations. While the Bank styles its motion as a “motion to dismiss,” neither of these two theories for dismissal fits within the typical confines of a motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). The court considers each argument (and the governing legal standards) in turn.

II. ANTI–SLAPP MOTION TO STRIKE

The court construes the Bank's “motion to dismiss based on the anti–SLAPP statute” as a special motion to strike brought under California's anti–SLAPP statute, Cal.Code Civ. Proc. § 425.16.⁹

A. Anti–SLAPP Statutory Scheme

“The Legislature enacted Section 425.16 to prevent and deter ‘lawsuits brought primarily to chill the valid exercise of the constitutional rights of freedom of speech and petition for the redress of grievances.’ ” Flatley, 39 Cal.4th at 312, 46 Cal.Rptr.3d 606, 139 P.3d 2 (quoting Cal.Code Civ. Proc. § 425.16(a) ). “Because these meritless lawsuits seek to deplete the defendant's energy and drain his or her resources, the Legislature sought to prevent SLAPPs by...