Mansha Consulting LLC v. AlakaiMansha Consulting LLC v. Alakai
ORDER GRANTING DEFENDANT TQM MATSUDA, INDIVIDUALLY, AND AS A DIRECTOR AND/OR OFFICER OF HAWAII HEALTH CONNECTOR’S MOTION TO DISMISS COMPLAINT FILED OCTOBER 28, 2016 AND GRANTING DEFENDANTS CLIFF ALAKAI AND ' JEFFREY KISSEL’S PRE-AN-SWER MOTION TO DISMISS FILED ON OCTOBER 28, 2016
For the reasons discussed below, the Court GRANTS Defendant Tom Matsuda, Individually, and as a Director and/or Officer of Hawaii Health Connector’s Motion to Dismiss Complaint Filed October 28, 2016, ECF No. 12, to which Defendants Cliff Alakai and-Jeffrey Kissel filed a join-der, ECF No. 21, and GRANTS Defendants Cliff Alakai and Jeffrey Kissel’s Pre-Answer Motion to Dismiss Complaint Filed on October 28, 2016, ECF No. 20.
FACTUAL BACKGROUND
In 2010, the • Affordable Care Act (“ACA”) required states to establish health exchanges to facilitate, for individuals and entities, the selection, purchase, and enrollment'in private health insurance plans. Compl. ¶ 13, ECF No. 1. As a result, the State of Hawaii established the Hawaii Health Connector (“HHC” or the “Connector”), the State’s health insurance exchange. Id. ¶ 14. To assist with its obligations, and in particular, to implement neсessary information technology programs and systems, HHC retained Plaintiff Mansha Consulting, LLC (“Mansha” or “Plaintiff’). Id. ¶¶ 12, 16, 17.
Eventually, HHC collapsed. Id. ¶ 22. Since HHC’s collapse, Mansha has attempted to recover its losses by demanding compensation from HHC, contacting CMS directly, and communicating with other relevant third parties. Id
In relation to Defendants actions in mishandling the invoice payments, Mansha alleges that Defendants were negligent and breached their fiduciary duties. Id ¶ 23. As a result, Mansha claims, inter alia, that its value as a company has been diminished, a pending acquisition of Mansha was derailed, and that it has lost millions of dollars. Id.
With respect to the specific Defendants at issue in the instant Motions to Dismiss, the Complaint contains the following allegations.
Defendant Cliff Alakai (“Alakai”) was the Chairman of the Board of Directors for HHC during the relevant time period and at some point served as Treasurer for the Board of Directors. Id. ¶ 26(a). Alakai’s duties in this role included ensuring proper operation of HHC. Id. ¶ 26(c). Mansha informed Alakai that the invoices were not being forwarded to CMS. Id. ¶ 26(b). Ala-kai failed to properly manage and oversee HHC with respect to the handling of invoices and the issues raised by Mansha, and took no actions to correct the issues. Id. ¶¶ 26(d), (e).
Defendant Tom Matsuda (“Matsuda”) was thе Interim Executive Director of HHC “from a date unknown” until approximately October of 2014. Id. ¶ 27(a). Mat-suda’s duties in this role included responsibility over the overall administration of HHC including financial, personnel, and operational requirements. Id. ¶ 27(b). Mat-suda failed to investigate and resolve the ongoing issues faced by Mansha and misinformed Mansha about the reasons for delay of payment. Id. ¶ 27(d).
In particular, Matsuda negligently misinformed Mansha that the invoices were not being forwarded to CMS because there was a restriction on funds initiated by either CMS or HHC. Id. ¶¶ 27(d), (e). Mansha later learned that although such a restriction may have existed for a short period of time, the restrictions had been cleared and its invoices could have been paid. Id. ¶ 27(d). As a result of this misinformation, Mansha was unable to take action which would have resulted in proper payment. Id. Matsuda also made erroneous assurances to Mansha that it would be paid on its submitted invoices. Id. ¶ 27(f).
Defendant Jeffrey Kissel (“Kissel”) was HHC’s Executive Director starting in October of 2014. Id. ¶ 28(a). Kissel failed to properly ensure investigation and resolution of ongoing issues faced by Mansha. Id.
PROCEDURAL BACKGROUND
Plaintiff filed a Complaint against Defendants on October 28, 2016. The Complaint raises claims for negligence and breach of fiduciary duty against all Defendants.
On December 5, 2016, Matsuda filed a Motion to Dismiss Complaint Filed October 28, 2016. ECF No. 12. Mansha filed its Opposition on December 30, 2016. ECF No. 19. Alakai and Kissel filed a Non-Substantive Joinder to Matsuda’s Motion to Dismiss on December 30, 2016. ECF No. 21. Matsuda filed a Reply on January 20, 2017. ECF No. 26.
On December 30, 2016, Alakai and Kis-sel filed a Pre-Answer Motion to Dismiss Complaint Filed on October 28, 2016. ECF No. 20. - Plaintiff filed its Opposition on January 13, 2017. ECF No. 25. Alakai and Kissel filed a Reply on January 20, 2017. ECF Nos. 27-28. On January 20, 2017 Matsuda filed a Nop-Substantive Joinder to Defendants Alakai and Kissel’s Reply. ECF No. 29.
The Court held a hearing on both Motions to Dismiss on February 2,2017.
STANDARD
I. Rule 12(b)(6)
Federal Rule of Civil Procedure (“Rule”) 12(b)(6) authorizes the Court to dismiss a complaint that fails “to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Rule 12(b)(6) is read in conjunсtion with Rule 8(a), which requires only “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,
In resolving a Rule 12(b)(6) motion, the Court must'construe the complaint in thé light most favorable to the plaintiff and accept all well-pleaded factual allegations as true. Sateriale v. R.J. Reynolds Tobacco Co.,
When the Court dismisses a complaint pursuant to Rule 12(b)(6) it should grant leave to amend unless the pleading cannot be cured by new factual allegations. OSU
II. Statute of Limitations
“A claim’ may be dismisséd as untimely pursuant to a 12(b)(6) motion ‘only when the running of the'statute [of limitations] is apparent on the face of the complaint.’” U.S. ex rel. Air Control Techs., Inc. v. Pre Con Indus., Inc.,
DISCUSSION
I. Count I: Negligence
A. Statute of Limitations as to Defendant Matsuda
Matsuda maintains that Plaintiffs negligence claim against him is time-bárred by Hawaii’s statute of limitations. Matsuda’s Mem. in Support of Motion to Dismiss (“Matsuda Mem.”), at 7, ECF No. 12-1. The Court disagrees.
In diversity cases, “federal courts generally apply state statutes related to the commencement and tolling of statutes of limitations.” Aana v. Pioneer Hi-Bred Int’l, Inc.,
Specifically,-HRS § 657-7 provides that causes of action for personal injury “shall be instituted within two years after the cause of action accrued.” Under Hawaii law, a claim “does not ‘accrue’ and the statute of. limitations in § 657-7 does not begin to run, until the plaintiff knew or should have known of the defendant’s negligence.” Aana,
Matsuda claims that the statute of limitations as to him expired because the claim accrued on his last day as Interim Executive Director of HHC. Matsuda Mem., at 8. The Complaint provides that Matsuda was the Interim Executive Director until ^apprоximately October, 2014,” Compl. ¶ 27(a), and Matsuda argues that “Plaintiffs-negligence claim against Mat-suda is expressly based on conduct that had to have occurred on or before Matsu-da’s last day as Interim Director,” Matsuda Mem., at 8. Because the Complaint was filed on October 28, 2016, to be timely, Plaintiffs negligence claim must have accrued on October 28, 2014 or later. Matsuda attached a Declaration to his Motion to Dismiss, claiming that he served as Interim Executive Director until October 24, 2014. Matsuda Decl. ¶ 4. On this basis, Matsuda argues that the negligence claim is time-barred.
In the first instance, the Court agrees with Mansha that it is inappropriate to consider Matsuda’s Declaration at the Motion to Dismiss stage. See Memorandum in Support of Plaintiffs Opposition to Defendant Tom Matusda’s Motion to Dismiss
Moreover, as Mansha points out, and as noted above, the negligence claim accrues at “the moment plaintiff discovers or should have discovered the negligent act, the damage, and the causal connection between the former and the latter.” Aana,
Under these circumstances, it cannot be said that the running of the statute of limitations is apparent from the face of the Complaint. Accordingly, the Court denies Matsuda’s Motion to Dismiss on this basis.
B. Whether the Complaint SuffL ciently Alleges a Claim for Negligence Against Defendants Matsu-da, Alakai, and Kissel
Both Motions to Dismiss argue that Mansha’s negligence claim against Defendants must be dismissed because Mansha has failed to allege that Defendants’ conduct violated a duty owed, to Mansha independent of the contract between HHC and Mansha. The Court agrees.
The parties agree that Francis v. Lee Enterprises, Inc.,
The proposition that tort recovery is not available where the duties alleged are not independent or separate from contractual obligations has been recognized by other courts in the Ninth Circuit. In Bernstein v, GTE Directories Corp., for example, plaintiffs were attorneys who contracted with the defendant to place their contact information along with an advertisement in a local telephone directory.
On appeal, the plaintiffs argued that the district court incorrectly granted summary judgment on their negligence claim, because the defendant negligéntly published the directories and “breach[ed] its obligation to perform its services in a skillful, careful, and diligent manner.” Id. at 482. Applying Nevada law, the court rejected the plaintiffs’ argument, finding that “the actions or omissions complained of’ did not “constitute a violation of duties imposed by. law” and instead involved “duties arising by virtue of the alleged express agreement between the parties.” Id. (quoting Bernard v. Rockhill Development Co.,
The Ninth Circuit reached a similar result in Kelomar, Inc. v. Kulow, applying California law.
The Court agrees with Defendants that here, Plaintiff has failed to allege a duty owed by the- Defendants to Mansha that is “independently recognized by principles of tort law.” Francis,
First, the Complaint asserts that Defendants owed certain duties given their roles as directors and officers of HHC. For instance, the Complaint states that Alakai, as Chairman of the Board of the Connector, “had a duty to ensure proper operation of the Connector, to oversee and en
As Defendants Alakai and Kissel note, however, these duties were duties owed by Defendants to HHC through their employment contract with HHC; they are not owed to third party contractors, like Man-sha. Accordingly, the above-mentioned allegations fail to assert a legally recognized duty as neеded to put forth a valid negligence claim against Defendants, See Restatement (Third) Of Agency § 7.02 (2006) (“An agent’s breach of a duty owed to the principal is not an independent basis for the agent’s tort liability to a third party. An agent is subject to tort liability to a third party harmed by the agent’s conduct only when the agent’s conduct breaches a duty that the agent owes to the third party.).
With respect to allegations in the Complaint regarding a specific duty owed by Defendants to Mansha, the Complaint merely states that Defendants “owed MANSHA a duty to take reasonable care in the carrying out of [their] responsibilities to protect MANSHA against foreseeable risks.” Compl. ¶¶ 26(f), 27(g), 28(g). The Court agrees with Defendants that this allegation is conclusory and insufficient to withstand a motion to dismiss. See Ashcroft,
Moreover, the negligent conduct alleged invokes duties that would only arise from the contract between HHC and Mansha. Mansha essentially claims that Defendants failed to investigate and resolve the issues involving Mansha’s unpaid invoices and failed to issue stop work orders for Man-sha; and that Defendants Matsuda and Kissel negligently misinformed Mansha about the reasons for delay and the status of the payments, leading to additional damages. See Compl. ¶¶ 26-28. These allegations involve HHC’s alleged failure to perform on the contract, i.e., its failure to pay Mansha for its work. They do not involve violations of any duty independently recognized by Hawaii tort law. See Francis,
Mansha attempts to argue that its allegations that Defendants Matsuda and Alakai made affirmative representations that Mansha would be paid involved a duty independent from the contract between Mansha and HHC. However, this claim attempts to “turn[ ] a promise to perform into a statement of fact so that failure to perform automatically shows a misrepresentation of intention to perform.” Catamount Radiology, P.C. v. Bailey, No. 1:14-CV-213,
Mansha also broadly asserts that Defendants owed a general duty to “refrain from negligent conduct” and “behavior.” Opp. to Matsuda Motion, at 8-9; Memorandum in Support of Plaintiffs Opposition to Defendant Alakai and Kissel’s Motion to Dismiss (“Opp. to Alakai and Kissel Motion”), ECF No. 25, at 6-7. However, as Defendants argue, Mansha’s support for this claim is based on cases that are inapposite as they involve the duty to refrain from conduct that imposes a risk of physical injury on others. Here, there is no physical injury alleged.
First, Mansha cites to a California case in which the California Supreme Court noted that a' director of a corporation “owe[s] a duty of care, independent of the corporate entity’s own duty, to refrain from acting in a manner that creates an unreasonable risk of personal injury to third parties.” Frances T. v. Vill. Green Owners Ass’n,
As noted above, Frances T., unlike the instant case, involved a duty of care to avoid an unreasonable risk of physical injury, and is accordingly distinguishable. Frances T. also included specific allegations that the directors were aware of a “hazardous condition” that could cause “physical injury” to the plaintiff. A comparable set of allegations is not present in the instant case.
Ah Mook Sang v. Clark,
[Wjhether a social host who invites a minor onto his or her property and then directly serves alcohol to the minor owes a duty of care to prevent foreseeable injuries resulting from consumption of the alcohol, or to render or summon aid if injuries have occurred, while the minor remains on the property as a guest.
Id. at 914, The minor who was served the alcohol in Ah Mook Sang died as a result of alcohol intoxicаtion. Id.
Ah Mook Sang is clearly distinguishable. The court found that the defendant in Ah Mook Sang had a special relationship with the minor as an invitee on his property. The court also emphasized that the duty at issue related to preventing physical harm from ocсurring, and the physical harm at issue in Ah Mook Sang was death. Here, such factors are not present.
Mansha also cites to Cahill v. Hawaiian Paradise Park Corp. in attempt to support its claims.
Cahill, however, is distinguishable from the instant case. Namely,' in Cahill, there was no contract between the defendant corporation and the plaintiff. The allegations thus included assertions of a duty independently" recognized by tort law. Here, the relationship between' the parties arises from the contractual relationship between’HHC and Mansha; and as noted above, Mansha has' failed to’ sufficiently allege a duty owed by the Defendants to Mansha.
The Court notes “[t]he general rule [ ] that a person does not have a duty to act affirmatively to protect another person from harm.” Lee v. Corregedore,
Here, Mansha has failed to support its claim that the directors and officers of HHC owed duties to Mansha, a third party contracting with HHC, to prevent eeonom
II. Count II: Breach of Fiduciary Duty
Defendants additionally argue that Mansha’s breach of fiduciary , duty claim should be dismissed because Defendants owed no fiduciary duty to Mansha. In turn, Mansha maintains that the fiduciary duties owed to Mansha by Defendants stemmed from HHC’s insolvency, pursuant to the trust fund doctrine. The Court finds that Mansha’s fiduciary duty claim against Defendants should be dismissed.
Mansha claims that the trust fund doctrine, followed in Hawaii, serves as a basis for fiduciary duties to attach to Defendants in the instant case. The trust fund doctrine is recognized in some jurisdictions as imposing certain fiduciary duties on a corporation’s directors when the corporation becomes insolvent. The basic concept of the doctrine is “that all of the assets of a corporation, immediately on its becoming insolvent, exist for the benefit of all of its creditors and that thereafter no liens or rights can be created either voluntarily or by operation of law whereby one creditor is given an advantage over others.” 15A William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 7369 (rev. vol. 2009).
Very fеw cases in Hawaii have involved the trust fund doctrine and most of these cases are over a hundred years old. See, e.g., Hemenway v. Honolulu Clay Co.,
Hawaii courts appear to have found that only directors and not officers fall under the scope of the trust fund doctrine. In California Feed Co., the Supremе Court of the Republic of Hawaii recognized the trust fund doctrine, noting that
when ... a corporation is hopelessly insolvent and unable to carry out objects for which it is created, the directors must be regarded as trustees of the property for the benefit of the creditors and stockholders, and it is then their duty to wind up the affairs of the corporation for the benefit of all eoncerned[.]
Here, the Complaint, in describing the Defendants at issue under Count II, refers only to Alаkai as being a director of HHC, i.e., the Chairman of the Board. See Compl. ¶ 37. Matsuda and Kissel are referred to only as officers of HHC, i.e., the Interim Executive Director and Executive Director, respectively. Id ¶¶ 38-39. Accordingly, Matsuda and Kissel would not be liable under the trust fund doctrine, as they were not directors of HHC.
With respect to Defendant Alakai, the Complaint describes Alakai as a Chairman of the Board under Count II and under Count I also notes that Alakai functioned as the Treasurer for the Board of Directors “during some time.” Id. ¶ 26(a). As stated in the Complaint, the establishment of HHC “was codified in Hawaii Revised Statutes, §§ 435H-1-435H-12.” Compl. ¶ 14. Pursuant to HRS § 435H-2(a), HHC was established as a “Hawaii nonprofit corporation organized and governed pursuant to chаpter 414D, the Hawaii nonprofit corporations act.”
Any person who serves as a director to the corporation without remuneration or expectation of remuneration shall not be liable for damage, injury, or loss caused by or resulting from the person’s performance of, or failure to perform duties of, the position to which the person was elected or appointed, unless the person was grossly negligent in the performance of, or failure to perform, such duties.
Defendant Alakai asserts in his Motion to Dismiss that all of the directors of HHC were uncompensated. See Alakai and Kissel Mem. in Support of Motion to Dismiss, at 3, ECF No. 20-1. The Court notes that Mansha’s Complaint does not allege that any of HHC’s directors were remunerated for their services.
The Complaint also does not allege that Defendant Alakai — or any of the other
Therefore, the Court GRANTS the Motions to Dismiss with respect to Count II of the Complaint WITHOUT PREJUDICE and'WITH LEAVE TO AMEND.
CONCLUSION
For the foregoing reasons, the Court GRANTS Defendant Tom Matsuda, Individually, and as a Director and/or Officer of Hawaii Health Connector’s Motion to Dismiss Complаint Filed October 28, 2016, ECF No. 12, to which Defendants Alakai and Kissel filed a joinder, ECF No. 21, and GRANTS Defendants Cliff Alakai and Jeffrey Kissel’s Pre-Answer Motion to Dismiss Complaint Filed on October 28, 2016, ECF No. 20.
Mansha must file an amended complaint within thirty days of the entry of this Order or else judgment will be entered against it with respect to Defendants Mat-suda, Alakai, and Kissel. Any amended complaint must correct the deficiencies noted in this Order or Mansha’s claims against Defendants Matsuda, Alakai, and Kissel may be dismissed 'with prejudice.
IT IS SO ORDERED.
Notes
. The Complaint also raises claims against Eric Alborg, HHC’s Deputy Executive Director, and Diane Reich, HHC’s Chief Financial Officer. Compl. ¶¶ 29(a), 30(a). On January 24, 2017, Mansha filed a Motion for Extension of Time to Serve these Defendants noting that Mansha had diligently attempted personal service. ECF No. 30. The Magistrate Judge granted Mansha’s request on January 30, 2017, extending the time for service until April 26, 2017. ECF No. 31.
. Mansha attaches to its Opposition to Matsu-da’s Motion to Dismiss a Declaration from a . principal of Mansha providing that he delivered an invoice dated October 1, 2014. to HHC, for which the due date was October 31, 2014. Raheja Decl. ¶ 3. The Declaration states that the first day the invoice would have been late was November 1, 2014. Id. ¶ 4. On this basis, Mansha argues that the earliest date the negligence claim could have accrued would have been November 1, 2014, making the claim timely. Opp. to Matsuda Motion, at 7. As with the evidence submitted by Matsuda, the Court finds it inappropriate to consider the' Declaration submitted by Mаnsha in a Motion to Dismiss.
. In their Reply, Defendants Alakai and Kissel assert that Mansha’s claims are barred pursuant to the economic loss doctrine. Alakai and Kissel Reply, at 6. The Court notes that it is inappropriate to consider arguments raised for the first time in Reply. See Local Rule 7.4 ("Any argument raised for the first time in the reply shall be disregarded.”). Moreover, given that the Court is dismissing the Complaint without prejudice for the reasons discussed above, it need not consider at this time this additional argument.
. The director at issue in Troy Laundry was also the corporation’s vice-president, general manager, and principal stockholder.
Troy Laundry cites to a Seventh Circuit case which discussed the trust fund doctrine as imposing duties on both directors and officers. Id. at 390 (citing Sutton Mfg. Co. v. Hutchinson,
. Chapter 435H of the Hawaii Revised Statutes, which created HHC, was repealed in 2016 after HHC ceased operations. See 2016 Haw. Sess. Laws Act 44, § 3.
. The Court notes that while Mansha has described the other .Defendants as officers in Count II, in .the description of thе parties in ¶¶ 5-9 of the Complaint, each Defendant is referred to as a "director and/or officer.” Accordingly, because of the lack of clarity in the pleadings, in the event that Defendants Mat-suda and Kissel were directors of HHC, they likewise would not be liable to Mansha pursuant to HRS § 414D-149(f).
. Defendants Alakai and Kissel- also claim that Mansha failed to join.HHC or its receiver as a party rendering the breach of fiduciary claim procedurally defective. See Alakai and Kissel Reply, at 16. Alakai and Kissel cite to Delaware and North Carolina law to support their positions. Given that the Court is dismissing the breach of fiduciary claim for the reasons discussed above, the Court finds it unnecessary to consider Defendants’ arguments - at this time.