IN RE GATEWAY COMMUNICATIONS, INC., (Bankr.S.D.Ohio 2002)

JEFFERY HOPKINS, Bankruptcy Judge.

Pursuant to F.R.Bankr.P. 9033(a), the following constitutes the Court's proposed findings of fact and conclusions of law. Presently before the Court is a Fed.R.Civ.P. 12(b)(6) motion to dismiss for failure to state a claim (Doc. 16). By its amended complaint ("Complaint") (Doc. 11), Gateway Communications, Inc. ("Gateway") seeks recovery from the Defendants, Silicon Valley Bank and Silicon Valley Financial Services ("Silicon Valley" or "the Defendants") for: (1) breach of contract; (2) negligence; (3) negligent misrepresentation; (4) breach of fiduciary duty; and (5) fraud.

This adversary proceeding does not constitute a core proceeding. See 28 U.S.C. § 157(b)(2). However, this adversary proceeding "is otherwise related to a case under title 11" because its outcome may affect the Debtor's bankruptcy estate. See 28 U.S.C. § 157(c)(1); Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 482 (6th Cir. 1992), cert. denied, 506 U.S. 1079 (1993), reh'g denied, 507 U.S. 1002 (1993); Michigan Employment Security Comm'n v. Wolverine Radio Co., Inc., 930 F.2d 1132, 1142 (6th Cir. 1991), cert. dismissed, 503 U.S. 978 (1992). When presented with "non-core but related" proceedings where all parties do not consent to the entry of final orders, bankruptcy judges are required to submit to the district court proposed findings of fact and conclusions of law. See 28 U.S.C. § 157(c). The Defendants do not consent to the entry of final orders by this Court in this proceeding. (See Doc. 5 at pg. 2 of Mem. in Supp. of Mot. to Withdraw Reference.)

LEGAL STANDARD UNDER RULE 12(b)(6)

"The purpose of Rule 12(b)(6) is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993). A motion to dismiss for failure to state a claim may be granted only if the court has no doubt that relief cannot be granted under any set of facts that could be proved consistent with the allegations set forth in the complaint. Hartford Fire Ins. Co. v. California, 113 S.Ct. 2891, 2917 (1993); Hishon v. King Spalding, 104 S.Ct. 2229, 2232 (1984); Conley v. Gibson, 78 S.Ct. 99, 102 (1957). In essence, the complaint need only contain either direct or inferential allegations with respect to all material elements of a viable legal theory. Varljen v. Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001); Glassner v. R.J. Reynolds Tobacco Co., 223 F.3d 343, 346 (6th Cir. 2000). This is a very liberal standard which favors the plaintiff, on whose behalf each of the allegations of the complaint must be construed and accepted as true. Blakely v. United States, 276 F.3d 853, 863 (6th Cir. 2002); Herrada v. City of Detroit, 275 F.3d 553, 556 (6th Cir. 2001). However, legal conclusions and summary allegations need not be accepted as true-only "well-pleaded" allegations. Blakely, 276 F.3d at 863 (legal conclusions); Varljen, 250 F.3d at 429 (well-pleaded allegations only); Jackson v. City of Columbus, 194 F.3d 737, 745 (6th Cir. 1999) (summary allegations), abrogated on other grounds, Swierkiewicz v. Sorema N.A., 122 S.Ct. 992 (2002).

FACTUAL ALLEGATIONS

This case involves a dispute over a factoring contract. Accepting as true all the allegations in the Complaint, the following facts emerge: In 1986, Gateway was a start-up company whose business was "providing consulting and solutions integration products and services in support of networked communications systems infrastructures, and outsourced information technology services, to and for a diverse customer base of medium-to large-sized companies." From 1986 through 1997, Gateway generated and sustained moderate growth in both revenues and profits. In about 1997, Gateway developed a growth plan in an effort to expand its business operations and to prepare potentially for an initial public offering of its stock. During the period 1995 through 1998, Gateway's annual sales increased from approximately $5,000,000 to almost $20,000,000. By this time, Gateway also had developed a significant networking vendor relationship with Cisco Systems, Inc. ("Cisco"). In 1998, Gateway achieved "Gold Certified Partner" status with Cisco, was awarded Cisco's "Top Tier Service Provider" Award and was Cisco's "preferred local partner" in the Ohio sales and service region.

Here, we reiterate much of what is stated in the Complaint. In as much as this Court "need not accept as true legal conclusions or unwarranted factual inferences," Gregory v. Shelby County, Tennessee, 220 F.3d 433, 446 (6th Cir. 2000) (citing Mixon v. State of Ohio, 193 F.3d 389, 400 (6th Cir. 1990)), those have been excluded.

Subsequently, Gateway officials determined that the company needed to obtain additional outside capital to support and sustain its continued growth. Gateway thereafter sought to increase its credit lines with its major vendors and with its principal and senior debt lender, Star Bank, N.A., n/k/a U.S. Bank, N.A. ("U.S. Bank"). In about June, 1998, Gateway secured a subordinated debt mezzanine financing loan from Sirrom Funding Corporation, a wholly-owned subsidiary of Sirrom Capital Corporation n/k/a Finova Mezzanine Capital ("Finova"). After the Finova relationship was secured, however, U.S. Bank unexpectedly rescinded its prior offer to increase Gateway's line of credit and, instead, converted Gateway's account to "workout" status, thereby causing serious financial problems and pressures for Gateway.

In the latter half of 1998, Gateway hired a broker to assist it in its efforts to obtain the venture capital or financing that it needed to face the mounting financial problems that it was then confronting. Toward the end of 1998, Cisco introduced Gateway to Silicon Valley, and Cisco offered its assistance and support to Gateway in the creation of a relationship between the parties. During the period November 1998, through February, 1999, Gateway entered into serious discussions with Silicon Valley to obtain financing. During these discussions, agents for Silicon Valley expressly represented to Gateway that Silicon Valley intended to and would provide a financing arrangement with and for Gateway with "overall flexibility" and "relaxed covenants;" that Silicon Valley was prepared to fulfill its order processing, funding, administrative and other duties under the proposed agreement immediately upon the execution thereof; that the agreement would be "open-ended" and would contain no "termination-related fees;" and that the implementation and administration of such arrangement "would not negatively affect Gateway's cash flow." Silicon Valley further represented to Gateway that it desired to enter into an agreement with Gateway pursuant to which Gateway would be able to "quickly convert accounts receivable to cash" and "significantly increase its access to credit" and would have "ready access" to funds in an amount of up to $6,000,000. (Complaint at ¶¶ 7-20.)

On or about February 18, 1999, Gateway entered into a written Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Silicon Valley. As noted, the Purchase Agreement contemplates a factoring contract between the parties whereby Gateway would offer to sell accounts receivable to Silicon Valley on an ongoing basis. In the event that Silicon Valley — in its sole discretion — decided to purchase any of the receivables offered, the Defendants would advance to Gateway 80% of the face amount of the purchased receivables in exchange for monthly administrative fees and finance charges. Silicon Valley was required to deposit the balance of the face amount of the purchased receivables into a reserve. The Purchase Agreement further contemplated a lockbox arrangement whereby all of Gateway's account debtors (regardless of whether such accounts were purchased by Silicon Valley) would remit payment to the lockbox and such payments would be forwarded to the Defendants. As security for the funds advanced by Silicon Valley, Gateway granted Silicon Valley a security interest in, inter alia, all of its accounts receivables. If Gateway was not in default on its payment of the administrative fees and finance charges, Silicon Valley was required to remit to Gateway the payments received on the non-purchased receivables. In addition, at the end of each month if Gateway was not in default under the Purchase Agreement, Silicon Valley was required to pay Gateway the accrued monthly reserve less any adjustments, repurchase amounts and professional fees and expenses.

Importantly, the Purchase Agreement gave Silicon Valley the ability to change the advance percentage at any time in its sole discretion.

The parties operated under the Purchase Agreement for nearly a year. In January 2000, however, Silicon Valley demanded that Gateway sign a January, 2000 Loan Modification Agreement, (the "Modification Agreement") which substantially amended and restated several key provisions of the factoring contract between the parties. The Modification Agreement which was signed by the parties on January 20, 2000, inter alia, reduced the amount which Silicon Valley was required to advance to Gateway on purchased accounts receivable from 80% to 75% upon its execution, and further to 70% effective February 28, 2000. In addition, the Modification Agreement increased the amount of the finance charges, administrative fees and other costs which Gateway was obligated to pay Silicon Valley. Finally, the Modification Agreement contained a "predatory" clause which obligated Gateway to pay a "success fee," i.e., a termination fee, to Silicon Valley upon the sale of the assets or stock of Gateway to a purchaser, with the "success fee" percentage increasing the longer that Gateway's assets or stock remained unsold. (Complaint at ¶¶ 21-30.)

In early March, 2000, Silicon Valley completely stopped all funding of Gateway, even though it continued to collect all of the payments being made by Gateway's customers to the lockbox. The Complaint alleges that as "a direct and proximate result of this action, and with Silicon Valley's knowledge, Gateway struggled to, but did, meet its March 15, 2000, payroll obligations." Silicon Valley then "offered" to release $250,000 to Gateway so that the company could meet its March 31, 2000 payroll. In exchange for the release of funds, however, Silicon Valley demanded a 30% equity stake in Gateway, which percentage would increase the longer that Gateway's assets or stock were not sold. Gateway, however, rejected this demand.

Finally, the Complaint contends that as "a direct and proximate result of Silicon Valley's actions and omissions, Gateway was forced to suspend all of its operations and to temporarily lay off its employees beginning on March 31, 2000, until such time as it could obtain the necessary money to further fund such activities." Shortly thereafter, Silicon Valley notified Gateway of its intention to sell Gateway's assets to satisfy Gateway's obligations to the bank under the various agreements between the parties. Despite continuing efforts by Gateway officials to salvage the company during the weeks that followed, Gateway was forced to commence a Chapter 11 bankruptcy proceeding in this Court on May 24, 2000. Subsequently, Gateway filed the instant Complaint seeking monetary damages against Silicon Valley asserting tort and contract claims for relief. (Complaint at ¶¶ 21-40.)

COUNT I: BREACH OF CONTRACT

The parties do not dispute that California law governs the breach of contract claim under Count One of the Complaint. The Purchase Agreement itself provides: "This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of California." (Purchase Agreement at ¶ 14.) To state a claim for relief for breach of contract under California law a plaintiff must plead:

[T]he existence of a contract, his or her performance of the contract or excuse for nonperformance, the defendant's breach and resulting damage. (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452, 459, 212 Cal.Rptr. 743.) If the action is based on alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written agreement must be attached and incorporated by reference. (Ibid.)

Harris v. Rudin, Richman Appel, 87 Cal.Rptr.2d 822, 828 (Cal.Ct.App. 1999). Although Count One avers that Silicon Valley breached the written contracts, the terms of those agreements were not set out verbatim nor were copies attached to the Complaint as required under California law. We conclude, however, that this minor procedural failing on Gateway's part does not hinder our ability to decide the motion under Rule 12(b)(6).

As noted, Gateway did not attach copies of the Purchase Agreement or the Modification Agreement to its Complaint. Silicon Valley, however, attached to its motion to dismiss copies of an Accounts Receivable Purchase Agreement, dated February 18, 1999, and a January, 2000 Loan Modification Agreement, dated January 20, 2000. (See Doc. 7 at Ex. A. and Ex. B) Silicon Valley contends that these documents are the ones referenced in the Complaint, a contention to which no objection has ever been lodged by Gateway. Accordingly, the Defendants' Exhibits A and B will be treated as the Purchase Agreement and Modification Agreement referred to in the Complaint and as such will be deemed part of the pleadings. See Jackson, 194 F.3d at 745 ("Documents attached to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to the plaintiff's claim."); Teagardener v. Republic-Franklin Inc. Pension Plan, 909 F.2d 947, 949 (6th Cir. 1990) (pension plan incorporated into complaint served as part of pleadings, for purposes of Rule 12(b)(6), and did not convert dismissal motion to motion for summary judgment); see also Barnum v. Millbrook Care Ltd. Partnership, 850 F. Supp. 1227 (S.D.N.Y. 1994) (contract attached to Rule 12(b)(6) motion properly considered part of pleadings in breach of contract action without converting motion to summary judgment); Smehlik v. Athletes and Artists, Inc., 861 F. Supp. 1162 (W.D.N.Y. 1994) (same).

A. Claims Arising From Conduct Occurring Before January 20, 2000

The essential question that must be resolved in determining whether to grant, in whole or in part, the Defendants' motion for dismissal with respect to the contract claims turns on the proper interpretation of the Purchase Agreement as amended by the Modification Agreement. Read together the agreements set forth the rights and obligations of the parties concerning the factoring arrangement. As its name suggests, the Modification Agreement substantially restated and amended certain terms agreed upon by the parties under the original factoring contract. (See Modification Agreement at ¶ 1.) Pursuant to the Modification Agreement, the parts of the Purchase Agreement that were not "expressly modified" remained "unchanged and in full force and effect." (Modification Agreement at ¶ 5.) In relevant portion, paragraph A of the Modification Agreement states "[Gateway] is indebted to [Silicon Valley] pursuant to an Accounts Receivable Purchase Agreement, dated as of February 18, 1999." Further, the Modification Agreement provides at paragraph 4 that "[Gateway] agrees that it has no defenses against the obligations to pay any amounts under the Obligations." (Modification Agreement at ¶ 4.) Based on this language, we hold, as a matter of law, that Count One of the Complaint fails to state a claim for breach of contract as it relates to Silicon Valley's conduct occurring before execution of the Modification Agreement.

The term "Obligations" is elsewhere defined as follows:

"Obligations" means all advances, financial accommodations, liabilities, obligations, covenants and duties owing, arising, due or payable by [Gateway] to [Silicon Valley] of any kind or nature, present or future, arising under or in connection with [the Purchase Agreement] or under any other document, instrument or agreement[.]

(Modification Agreement at ¶ A; Purchase Agreement at ¶ 1.16.)

The Complaint provides that "Gateway timely and substantially performed all of its obligations under said contracts, except those obligations which it was prevented from performing, or was legally excused from performing." (Complaint at ¶ 44.) In essence, Gateway pleads an "excuse for nonperformance." See Harris, 87 Cal.Rptr.2d at 828. Ordinarily, this would be sufficient to state a claim for breach of contract when attempting to overcome a dismissal motion. However, if an allegation is contradicted by documents referred to in the complaint, courts ought not accept that allegation as true under Rule 12(b)(6). See Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295-96 (9th Cir. 1998); Hoosier Energy Rural Elec. Co-op., Inc. v. Amoco Tax Leasing IV Corp., 34 F.3d 1310, 1318 n. 4 (7th Cir. 1994) ("A court need not accept as true a plaintiff's allegations concerning the meaning of an unambiguous contract."). The foregoing rule applies to Gateway's allegation of the existence of a legal excuse for its failure to perform obligations due Silicon Valley under the Purchase Agreement.

Here, the Modification Agreement between Silicon Valley and Gateway is clear and unambiguous. "In interpreting an unambiguous contractual provision we are bound to give effect to the plain and ordinary meaning of the language used by the parties." Coast Plaza Doctors Hospital v. Blue Cross, 99 Cal.Rptr.2d 809, 815 (Cal.Ct.App. 2000). According to the operative language of the Modification Agreement "[Gateway] is indebted to Silicon Valley" under the Purchase Agreement and "[Gateway] agrees that it has no defenses." (Modification Agreement at ¶¶ A and 4.) By agreeing to paragraphs A and 4 of the Modification Agreement, Gateway effectively waived all defenses for its nonperformance under the Purchase Agreement including those predicated upon the assertion of a legal excuse. see Scarborough Assocs. v. Fin. Fed. Savs. and Loan Ass'n, 647 So.2d 1001 (Fla.Dist.Ct.App. 1994) (modification agreement barred allegations about conduct occurring before it was entered), see also Russell v. Barnett Banks, Inc., 527 S.E.2d 25 (Ga.Ct.App. 1999) (court granted summary judgment in favor of defendant bank enforcing unambiguous "no defense" clause in a modification agreement). In essence, Gateway traded its right to contest whether conduct occurring prior to January 20, 2000, may have violated the Purchase Agreement in exchange for Silicon Valley's promise to enter into the Modification Agreement. (Modification Agreement at ¶ 4.) As consideration, Silicon Valley covenanted to continue and not terminate the financing arrangement between the parties beyond January 20, 2000, albeit with more onerous terms and conditions imposed on Gateway. Having confessed to a default under the Purchase Agreement and its inability to assert defenses, Gateway is precluded by the Modification Agreement from arguing facts in its Complaint that constitute claims against Silicon Valley for breach of contract predicated upon events occurring before January 20, 2000.

Before moving on to the question whether Count One of the Complaint at all asserts any claim for breach of contract that can survive the motion to dismiss, the Court must put to rest one final argument asserted by Gateway in an effort to circumvent the preclusive effect of the Modification Agreement. Gateway attempts to argue that the Modification Agreement itself is invalid, for purposes of deciding the dismissal motion, because the Complaint alleges the "defense" of economic duress. In rare instances, the doctrine of economic duress can serve to avoid the consequences of a contract modification such as occurred in this case. Rich Whillock, Inc. v. Ashton Dev., Inc., 204 Cal.Rptr. 86, 88 (Cal.Ct.App. 1984). "The doctrine . . . may come into play upon the doing of a wrongful act which is sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator's pressure." Id. at 89. Under the circumstances, however, we find Gateway's assertion of the economic duress doctrine to be without merit.

The alleged wrongful act upon which Gateway predicates its economic duress argument is the allegation that Silicon Valley "unreasonably and unjustifiably refused to release any funds to Gateway." (See Complaint at ¶ 32.) Because of the Defendants' refusal to release funds, Gateway was unable to obtain financing from other sources and was forced to sign the Modification Agreement to avoid financial ruin. (See Complaint at ¶¶ 30-35.) However, the unambiguous language of the Purchase Agreement again belies Gateway's allegations. Because the Purchase Agreement reflects that Silicon Valley had a legal right to withhold funds from Gateway upon default, the Court cannot accept as true Gateway's allegations of a "wrongful act." See Goldstone-Tobias Agency, Inc. v. Barbroo Enters. Productions, Inc., 47 Cal.Rptr. 347, 350 (Cal.Ct.App. 1965) ("The exercise of a legal right does not constitute unlawful duress or compulsion.").

If Gateway was not in default, the Purchase Agreement obligated Silicon Valley to distribute funds to it from three sources: (1) an advance of eighty percent of the face amount of the purchased receivables (Purchase Agreement at ¶ 2.2); (2) the accrued monthly reserve less any adjustments, repurchase amounts and professional fees and expenses (Purchase Agreement at ¶ 3.6); and (3) payments received on non-purchased receivables (Purchase Agreement at ¶ 15). The Purchase Agreement defines "default" as, inter alia, the failure by Gateway to pay any amount owed when due. (See Purchase Agreement at ¶ 10.) As stipulated, Gateway already was in default under the terms of the Purchase Agreement by being indebted to Silicon Valley. (See Modification Agreement at ¶¶ A, 4.) With Gateway in default, Silicon Valley had a preexisting legal right to withhold funds under the Purchase Agreement. (See Purchase Agreement at ¶ 11.)

Moreover, Gateway's reliance upon Rich Whillock in support of its economic duress argument is misplaced. The facts of Rich Willock are clearly distinguishable from those pled in Gateway's Complaint. The same court that decided Rich Whillock later elaborated upon its ruling as follows:

Rich Willock, Inc. ("R W") was a subcontractor that entered into a contract to provide grading and excavation services for $112,990. The contract expressly excluded the removal of rock. When R W encountered rock on the project site, the general contractor, Bob Britton, Inc. ("Britton"), and the developer, Ashton Development, Inc. ("Ashton"), authorized R W to remove the rock and bill for the additional costs. After receiving bi-weekly payments totaling $190,363, R W submitted a final bill for an additional $72,286. Britton and Ashton refused to pay, stating that the project was short on funds. R W informed Britton that it was a new business that needed the money to survive. Britton responded by offering $50,000 in full satisfaction of the debt. When R W expressed its dissatisfaction with the offer, Britton replied: "I have a check for you, and just take it or leave it, this is all you get. If you don't want this, you have got to sue me." R W reluctantly accepted the money and signed a release. Thereafter, R W filed suit against Britton and Ashton for breach of contract. The trial court entered judgment in favor of R W, concluding that the release was unenforceable because of the doctrine of economic duress. The appellate court affirmed.

In Rich Whillock several criteria coalesced to raise "economic duress" as a ground to escape a settlement: (1) the debtor knew there was no legitimate dispute and that it was liable for the full amount; (2) the debtor nevertheless refused in bad faith to pay and thereby created the economic duress of imminent bankruptcy; (3) the debtor, knowing the vulnerability its own bad faith had created, used the situation to escape an acknowledged debt; and (4) the creditor was forced to accept an inequitably low amount.

San Diego Hospice v. County of San Diego, 37 Cal.Rptr.2d 501, 507 (Cal.Ct.App. 1995). Here, the Modification Agreement, in contradiction to the averments of the Complaint, reflects that: (1) Gateway was in default and indebted to Silicon Valley, not the other way around; and that (2) pursuant to Gateway's acknowledged debt and lack of defenses, Silicon Valley was justified in refusing to release more funds to Gateway. To penalize Silicon Valley for exercising a valid contractual right would do violence to the parties' agreement and lead to an unjust result. Accordingly, Gateway's economic duress argument must fail.

B. Claims Arising From Conduct Occurring After January 20, 2000

The excerpted language from paragraphs A and 4 of the Modification Agreement, however, does not discuss potential breach of contract claims that might have arisen subsequent to January 20, 2000, when the Modification Agreement was signed. Nor do any of the clauses in the Modification Agreement contain promises that Gateway has "no defenses against the obligations to pay any amounts under the Obligations" related solely to it. The language used in the Modification Agreement was designed to address the parties rights existing as of January 20, 2000, but does not seek to foreclose either party's ability to bring suit for violations of the agreement that might occur afterwards. Thus, to the extent that the Complaint alleges well-pleaded claims for breach of contract predicated upon conduct occurring after January 20, 2000, the date that the Modification Agreement was executed by the parties, those claims are not barred by the language expressed in the written agreements.

Turning now to the Complaint, Count One alleges that "Silicon Valley failed to timely and/or properly perform its obligations under said agreements, including, but not limited to, Sections 2.5, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 4.2, 5.0, 7.1(F), 7.1(J), 10(E) and 15 of the Agreement." (Complaint at ¶ 23.) In Gateway's view, more "predatory" clauses were added under the Modification Agreement. However, none of those modifications altered the fundamental character of the original factoring contract. Because the Purchase Agreement remained "unchanged and in full force and effect" except as "expressly modified" by the Modification Agreement, Gateway's alleged breach of contract claims have to be taken as true for purposes of ruling on the motion to dismiss. What Gateway's claim boils down to, therefore, is an assertion that Silicon Valley "unreasonably and unjustifiably refused to release any funds to Gateway," thereby breaching its obligations under the terms of the Modification Agreement. (See Complaint at ¶ 32). Taking a view of the allegations in the Complaint in the light most favorable to the plaintiff, we conclude that Gateway has stated a claim upon which relief can be granted for breach of contract and as such that claim may not properly be dismissed under Rule 12(b)(6).

In its entirety, Paragraph 23 of the Complaint reads as follows:

23. After the execution of the aforesaid agreements, Silicon Valley was neither "flexible" nor "relaxed" in its dealings with Gateway; Silicon Valley failed to timely and/or properly perform its obligations under said agreements, including, but not limited to, Sections 2.5, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 4.2, 5.0, 7.1(F), 7.1(J), 10(E) and 15 of the Agreement; Silicon Valley otherwise failed to honor the duties and responsibilities that it legally owed to Gateway due to its undertaken and assumed role as Gateway's principal commercial lending partner which had obtained and thereafter exercised both active and extensive control over Gateway's business operations and affairs; and Silicon Valley generally administered its relationship with Gateway and processed the transactions contemplated by the aforesaid agreements in a poor and unprofessional manner; all as set forth more fully hereinafter and as will be developed even more fully through the evidence to be presented at trial; as a result of all of which Silicon Valley never provided to Gateway full, fair or reasonable access to funds in an amount anywhere approaching that which was desired and required by Gateway and as contemplated by, inter alia, all of the aforesaid agreements, and Gateway was seriously and detrimentally harmed as set forth more fully hereinafter and as will be developed even more fully through the evidence to be presented at trial.

We next turn to the tort claims asserted in the Complaint to determine whether the motion to dismiss should be granted as to them.

CHOICE OF LAW

Before examining the remaining counts of the Complaint, the Court must determine the governing law. Gateway argues that the choice of law provision in the Purchase Agreement is inapplicable to its non-contract claims. The Defendants take the contrary position. The choice of law provision states: "This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of California." (Purchase Agreement at ¶ 14.)

Courts within the Sixth Circuit must look to the language of the choice of law provision. See Moses v. Business Card Express, Inc., 929 F.2d 1131, 1139-40 (6th Cir. 1991), cert. denied, 502 U.S. 821 (1991). If the relevant language refers only to the construction of the contract, then the provision would not apply to non-contract claims between the parties. Id. If the language refers to more than just the construction of the contract, then the choice of law provision also applies to non-contract claims between the parties. Id. In Moses, the contract provided: "This Franchise and License Agreement and the construction thereof shall be governed by the laws of the state of Michigan." Based on this clause, the Sixth Circuit concluded that Michigan law governed the plaintiffs' claims for fraud and misrepresentation. Id. at 1140 ("If the clause provided merely that its construction would be governed by the law of Michigan, the plaintiffs would have support for their argument that it does not apply more generally."). Similarly, the District Court has ruled that claims for negligent misrepresentation and fraud were governed by a choice of law provision that stated: "This Agreement . . . shall be governed and construed in accordance with the laws of the state of California." See Globe Metallurgical, Inc. v. Hewlett-Packard Co., 953 F. Supp. 876, 884 n. 7 (S.D.Ohio 1996).

Given that the Purchase Agreement in this action is to be "governed by and interpreted in accordance with" California law, Moses and Globe dictate that Gateway's non-contract claims must be governed by California law as well. To conclude otherwise would render some of the foregoing language to be mere "surplusage." See Moses, 929 F.2d at 1140.

COUNTS II AND IV: NEGLIGENCE AND BREACH OF FIDUCIARY DUTY

To prevail on its negligence and breach of fiduciary duty claims, Gateway must show that Silicon Valley owed it a legal duty, that Silicon Valley in some way breached that duty, and that the breach was a proximate or legal cause of Gateway's injuries. See Merrill v. Navegar, Inc., 28 P.3d 116, 123 (Cal. 2001); also see Mosier v. S. Cal. Physicians Ins. Exch., 74 Cal.Rptr.2d 550, 565 (Cal.Ct.App. 1998) ("The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) the breach of that duty; and (3) damage proximately caused by that breach."). The Defendants argue that the Complaint fails to state a claim on these counts because they did not owe any duty to Gateway. We agree.

The Defendants take the position that Count Three, the negligent misrepresentation claim, should be dismissed for the same reason. The existence of a duty of care, however, is not a requisite element of negligent misrepresentation under California law. See Home Budget Loans, Inc. v. Jacoby Meyers Law Offices, 255 Cal.Rptr. 483, 487 (Cal.Ct.App. 1989) ("The elements of negligent misrepresentation, a form of deceit, are misrepresentation of a past or existing material fact, without reasonable ground for believing it to be true, and with intent to induce another's reliance on the fact misrepresented; ignorance of the truth and justifiable reliance on the misrepresentation by the party to whom it was directed; and resulting damage.").

The parties agree that a lender ordinarily does not owe a duty of care to a borrower if the lender's involvement amounts to nothing more than its conventional role as a mere lender of money. See Nymark v. Heart Fed. Sav. Loan Ass'n, 283 Cal.Rptr. 53, 56 (Cal.Ct.App. 1991). Even though some California courts appear to recognize a lender fiduciary relationship in certain cases it is rarely if ever applied in commercial transactions between parties of equal bargaining strength. See Mitsui Mfrs. Bank v. Superior Court, 212 Cal.Rptr. 793, 796 (Cal.Ct.App. 1989). Moreover, the concept that a lender may owe fiduciary duty to its customer has been viewed with growing skepticism among several California courts. See Price v. Wells Fargo Bank, 213 Cal.Rptr. 735, 739 (Cal.Ct.App. 1989). In the courts where the concept was recognized the rule has been that the lender must "actively participate in the financed enterprise beyond the domain of the usual money lender." Id. at 57. Silicon Valley contends that the Complaint does not reflect involvement beyond the scope of its conventional role. Gateway disagrees.

The Complaint contains the following allegations relevant to this issue: (1) "The relationship . . . between Gateway and Silicon Valley was a special relationship due in no small part to Gateway's and Silicon Valley's grossly unequal bargaining strengths and Gateway's precarious financial position" (Complaint at ¶ 22); (2) "Silicon Valley had and exercised a position of great superiority and influence over Gateway and its business affairs — to such an extent that Silicon Valley actively participated in such affairs" (Complaint at ¶ 22); (3) Gateway's and Silicon Valley's relationship exceeded the scope of one in which Silicon Valley would merely play the conventional role of being a simple lender of money; rather, it was fiduciary in nature (Complaint at ¶ 22); and (4) "Silicon Valley . . . exercised both active and extensive control over Gateway's business operations and affairs" (Complaint at ¶ 23.)

The foregoing statements do not constitute well-pleaded allegations under Rule 12(b)(6). "A well-pleaded allegation is one that alleges specific facts and does not merely rely upon conclusory statements." Gausmann v. City of Ashland, 926 F. Supp. 635, 638 (N.D.Ohio 1996). The Complaint fails to allege "specific facts" that substantiate Gateway's allegations of: a special relationship, grossly unequal bargaining strengths, a position of great superiority and influence, active participation, a relationship that exceeded the scope of the conventional role of a lender, a fiduciary relationship, and the exercise of active and extensive control. As such, the allegations mentioned in the Complaint do not establish any duty other than that of an ordinary borrower and lender owed by the Defendants to Gateway. Accordingly, the Complaint fails to state a claim as to Counts Two and Four.

By its responsive pleading, Gateway relies upon additional allegations in the Complaint as proof that the Defendants exceeded the scope of a lender's conventional role.

The Defendant represented itself to Gateway as an institution that eschewed the traditional principles of the lender-borrower association. (Id. ¶ 16). Instead, the Defendant indicated that it was guided by the principal [sic] of "partnership" in its relationships with its clients. (Id.). Accordingly, Gateway indicated that it would work to insure the "mutual success" of both lender and borrower. (Id.).

. . . .

. . . Gateway, a company with an acute need for capital, placed great faith in Silicon Valley with respect to the prompt release of advancements. (Id. ¶¶ 17, 22-25). Gateway entrusted its accounts receivables to Silicon Valley and, consequently, Silicon Valley enjoyed a position of infinite trust and superiority. (Id.).

(Doc. 18 at 19-20.) The foregoing allegations are not relevant because they are not probative of the issue of active participation beyond the domain of an ordinary lender. See Nymark, 283 Cal.Rptr. at 57.

COUNTS III AND V: NEGLIGENT MISREPRESENTATION AND FRAUD

Several of the representations that Gateway relies upon in support of Counts Three and Five are not actionable because they are mere representations of opinion or "puffery." See Cook, Perkiss and Liehe, Inc. v. Northern Cal. Collection Serv. Inc., 911 F.2d 242, 245 (9th Cir. 1990) (noting that federal courts often decide whether a representation constitutes a fact or opinion/"puffery" on a Rule 12(b)(6) motion); In re General Motors Corp. Anti-Lock Brake Prods. Liability Litigation, 966 F. Supp. 1525, 1534 (E.D.Mo. 1997) (same), aff'd, Briehl v. General Motors Corp., 172 F.3d 623 (8th Cir. 1999). Both negligent misrepresentation and fraud require proof of a misrepresentation of fact — not opinion. See Neu-Visions Sports, Inc. v. Soren/McAdam/Bartells, 103 Cal.Rptr.2d 159, 162 (Cal.Ct.App. 2000) (negligent misrepresentation); Daniels v. Oldenburg, 224 P.2d 472, 474 (Cal.Ct.App. 1950) (fraud). "In order to justify a finding that a representation was one of fact as distinguished from opinion it must appear that the matter referred to is within the range of definite knowledge and does not necessarily rest on belief and conjecture." Daniels, 224 P.2d at 474-75.

The following representations relied upon by Gateway are not "within the range of definite knowledge" and are better characterized as resting on "belief and conjecture."

Silicon Valley, through its authorized employees and agents, including, but not limited to, Mike Egan and David Baker, expressly represented to Gateway that it was a "very progressive" financial institution which was "extremely experienced" and "uniquely positioned" to serve the needs of "emerging growth companies" such as Gateway; that it was an institution which was guided in its relationships and in all of its dealings with its clients by the principles of "respect, trust, integrity, ownership, teamwork, empathy, innovation and excellence," and by the concepts of "partnership" and "mutual success;" and that it had "extraordinary resources" to bring to such relationship, adding that "the most important of which is devotion" and that "we are more interested in relationships than transactions." Silicon Valley further expressly and/or impliedly then represented to Gateway that it at all times acted in good faith and with the utmost honesty, fidelity, integrity, competence, professionalism and ethics in all of its dealings with its clients, and that it at all times dealt fairly and in a commercially reasonable manner with its clients and with respect to its clients' business operations and affairs.

(Complaint at ¶ 16.)

Silicon Valley . . . represented . . . that Silicon Valley was prepared to fulfill its order processing, funding, administrative and other duties under the proposed agreement immediately upon the execution thereof . . . and that the implementation and administration of such arrangement "would not negatively affect Gateway's cash flow."

(Complaint at ¶ 17.)

Silicon Valley . . . represented to and assured Gateway of Silicon Valley's sincere desire and intent to forthwith enter into and thereafter to timely perform all of its duties and obligations under said arrangement in a professional manner.

(Complaint at ¶ 18.) Because the foregoing representations are not representations of fact, they do not serve as the basis for a claim of negligent misrepresentation or fraud.

The remaining representations relied upon by Gateway in support of its claims for negligent misrepresentation and fraud are barred by California's version of the parol evidence rule. The remaining representations are as follows:

Silicon Valley . . . represented to Gateway that Silicon Valley then intended to and would provide a financing arrangement with and for Gateway with "overall flexibility" and "relaxed covenants;" . . . that the agreement would be "open-ended" and would contain no "termination-related fees;". . . . Silicon Valley further then represented to Gateway that it then desired to enter into an agreement with Gateway pursuant to which Gateway would be able to "quickly convert accounts receivable to cash" and "significantly increase its access to credit" and would have "ready access" to funds in an amount of up to six million dollars ($6,000,000).

(Complaint at ¶ 17.)

California law precludes proof of parol evidence of an alleged misrepresentation to establish a claim for fraud if the misrepresentation contradicts or varies the terms of an agreement between the parties. See Bank of America Nat'l Trust Savs. Ass'n v. Pendergrass, 48 P.2d 659 (Cal. 1935). This rule has been summarized as follows:

A distinction has been made by our courts in cases in which the fraud sought to be proved consists of a false promise. They have held that if, to induce one to enter into an agreement, a party makes an independent promise without intention of performing it, this separate false promise constitutes fraud which may be proven to nullify the main agreement; but if the false promise relates to the matter covered by the main agreement and contradicts or varies the terms thereof, any evidence of the false promise directly violates the parol evidence rule and is inadmissible.

Bank of America Nat'l Trust Savs. Ass'n v. Lamb Finance Co., Inc., 3 Cal.Rptr. 877, 880 (Cal.Ct.App. 1960). The rule has also been applied to claims for negligent misrepresentation. See Julian v. Held, No. G025049, 2001 WL 1497745 (Cal.Ct.App. Nov. 26, 2001).

To the extent that paragraph Seventeen of the Complaint contains representations of fact and not mere opinion, the representations contradict the terms of the Purchase Agreement and are barred as parol evidence. The only representation that appears to be stated as a fact is the representation "that the agreement would be `open-ended' and would contain no `termination-related fees[.]'" The other representations deal with the Defendants' intentions and desires. As to the lone representation of fact, Gateway argues that Silicon Valley failed to show how the alleged misrepresentation contradicts the terms of the Purchase Agreement. Yet, Gateway cannot have it both ways. If there is no contradiction, as Gateway implies, then the representation would not be false — an indispensable element of claims for fraud and negligent misrepresentation.

CONCLUSION

For the foregoing reasons, this Court concludes that the motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), should be granted, in part, and denied in part. All claims predicated on Silicon Valley's alleged breach of the Purchase Agreement occurring prior to January 20, 2000, should be dismissed. The claims for breach of the Modified Agreement and those provisions of the Purchase Agreement that remained in full force and effect after January 20, 2000, may proceed. In the ensuing action, Gateway also should be limited to prosecuting solely those claims for breach of contract that survived the Modification Agreement, i.e., allegations related to conduct occurring after January 20, 2000. Accordingly, the motion to dismiss Count One of the Complaint should be overruled. For the reasons already discussed, Counts Two, Three, Four and Five of the Complaint should be dismissed in their entirety. Pursuant to 28 U.S.C. § 157(c)(1) and F.R.Bankr.P. 9033(a), the Court hereby enters these findings of fact and conclusions of law and further RECOMMENDS that the District Court issue an order consistent with this memorandum.

IT IS ORDERED that the Clerk of this Court shall transmit to the United States District Court for the Southern District of Ohio the entire adversary file and these findings of fact and conclusions of law.