Unpublished Disposition, 905 F.2d 1540 (9th Cir. 1988)

No. 88-15834.

United States Court of Appeals, Ninth Circuit.

Before TANG and BEEZER, Circuit Judges, and ALBERT LEE STEPHENS,^*  District Judge.

MEMORANDUM^** 

Plaintiffs appeal the district court's order granting defendants' motion to dismiss their RICO cause of action, and remanding the remainder of plaintiffs' causes of action to state court. We affirm.

PROCEDURAL AND FACTUAL BACKGROUND

On October 1, 1976, defendant Warner Communications, Inc. ("Warner") bought the outstanding stock of Atari, Inc., now defendant Atari Holdings, Inc. ("Atari"). As part of this purchase, Warner negotiated new employment contracts ("Agreements") with certain key Atari, Inc. employees. Under these contracts, Warner agreed to create a Bonus Pool ("Plan") for many Atari, Inc. employees.

The Plan provided that if Atari's annual after-tax income exceeded $3,500,000, fifteen percent of income over that amount would be set aside and allocated among certain Atari employees who had been full-time employees at any time during the year. Bonuses were allocated by a three-member committee, called the Executive Compensation Committee ("Committee"). The Committee is composed of Atari's Chairman and its President, and a member to be named by Warner.

The provision of the Agreement which is the subject of this litigation is Paragraph 4 of the Plan: "This Bonus Plan may be altered or amended in any respect at any time by agreement of the Committee and PCI."¹  Defendants have produced evidence showing that the Plan was amended on December 12, 1981 to reduce the amount of funds distributed for 1981-82 by approximately 30 percent.

Plaintiffs based their complaint on failure of Warner to include and distribute fifteen percent of after-tax income over $3,500,000 for those years. In the second amended complaint, counts for breach of contract, fraud, and other contractual torts are included. They also claim violation of the RICO Act based on the contractual torts.

Defendants moved for summary judgment as to plaintiffs' two breach of contract counts and moved to dismiss the remainder of plaintiffs' claims pursuant to Rule 12(b) (6) for failure to state a claim. On November 23, 1988, the district court held that the Plan was properly amended, and that, therefore, plaintiffs could not support a claim for RICO violations. The court then dismissed the RICO claim, and remanded the remaining counts to state court. The plaintiffs appeal the judgment dismissing the RICO action. Notice of appeal was timely filed on December 22, 1988.

DISCUSSION

The plaintiffs attack the dismissal on two grounds. First, they argue that the district judge erroneously considered evidence outside the pleadings in dismissing plaintiffs RICO cause of action under Fed.R.Civ.Pro. Rule 12(b) (6). Second, they argue that the district judge erred in dismissing plaintiffs' RICO claim.

I. Did the district court err in considering evidence outside of the pleadings on this Rule 12(b) (6) motion to dismiss?

The standard of review on questions of law is de novo. United States v. McConney, 728 F.2d 1195, 1201-02 (9th Cir.), cert. denied, 469 U.S. 824 (1984).

The plaintiffs argue that the district court considered affidavits, depositions, and documents in reaching its conclusions on a motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.Pro. Rule 12(b) (6), and that this action constitutes reversible error. Bonilla v. Oakland Scavenger Co., 697 F.2d 1297 (9th Cir. 1982), cert. denied, 467 U.S. 1251 (1984).

Ninth Circuit law is clear in this area. When a district court looks beyond the pleadings, it must treat a motion to dismiss pursuant to Rule 12(b) (6) as a motion for summary judgment made pursuant to Rule 56. See Fed.R.Civ.Pro. Rule 12(b) (6). See also Grove v. Mead School Dist. No. 354, 753 F.2d 1528, 1532-33 (9th Cir.), cert. denied, 474 U.S. 826 (1985). In general, all parties should be given notice of a court's intention to follow this course, and given the opportunity to respond, including time for discovery. Id. See also Portland Retail Druggists Ass'n v. Kaiser Found. Health Plan, 662 F.2d 641, 645 (9th Cir. 1981).

However, " [i]n this circuit, notice is adequate if the party against whom judgment is entered is 'fairly apprised' that the court will look beyond the pleadings, thereby transforming the motion to dismiss into a motion for summary judgment." Grove, 753 F.2d at 1532-33 (citing Mayer v. Wedgwood Neighborhood Coalition 707 F.2d 1020, 1021 (9th Cir. 1983)). See also Portland Retail Druggists, 662 F.2d at 645. Notice is sufficient when a party has reason to know that the court will consider "matters outside of the pleadings." Townsend v. Columbia Operations, 667 F.2d 844, 849 (9th Cir. 1982). Only where the party against whom summary judgment is entered appears pro se is strict adherence with the requirements of Rule 56(c) necessary. Garaux v. Pulley, 739 F.2d 437, 439-40 (9th Cir. 1984).

In the present case, the district court clearly treated defendants' motion to dismiss as a motion for summary judgment and the plaintiffs had adequate notice of this action. It is apparent that the trial court, though characterizing its conclusion as a "dismissal for failure to state a claim," had considered matters outside the pleadings. For example, the court must have concluded that the Plan had been amended. The evidence of this amendment was provided by defendants in their reply memorandum in support of their motion to dismiss. See Portland Retail Druggists, 662 F.2d at 644; Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1254 (9th Cir. 1976).

The plaintiffs had adequate notice that the court would consider this a summary judgment motion. The underlying act supporting plaintiffs' RICO claim is that defendants wrongfully withheld funds from distribution in breach of the 1976 contract. As to this claim, defendants moved for summary judgment. Even though the defendants moved to dismiss the RICO cause of action under Rule 12(b) (6), the substance of their motion from the time of filing was for summary judgment. In addition, at oral argument the plaintiffs were prepared to argue against a motion for summary judgment as to the substantive issue underlying defendants' motion to dismiss plaintiffs' RICO claim. The action taken by the district court was not erroneous.

II. Did the district court err in dismissing plaintiffs' RICO claim?

The district court correctly held that plaintiffs did not state a claim for relief under RICO because the Agreement unambiguously allows for amendment of the Plan and that the Plan was properly amended, and that consequently there was no wrongful act to support a RICO violation.

A. Did the district court properly find that the Plan could be amended?

A federal trial court's interpretation of state law is subject to de novo review on appeal. In re McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984) (en banc). The plaintiffs argue that amendment of the plan violates the implied covenant of good faith and fair dealing, and, therefore, is unlawful.

In California, a covenant of good faith and fair dealing is implied in every contract. For example, " [t]he covenant of good faith and fair dealing implied in every contract has been held in certain special cases to supply a requirement of good cause for termination where the contract itself is silent or ambiguous on that subject." Gerdlund v. Electronic Dispensers Int'l, 190 Cal. App. 3d 263, 277 (1987). However, " [n]o obligation can be implied, ..., which would result in the obliteration of a right expressly given under a written contract." Id. See also Malmstrom v. Kaiser Aluminum & Chemical Corp., 187 Cal. App. 3d 299, 313-20 (1986); Brandt v. Lockheed Missiles & Space Co., 154 Cal. App. 3d 1124, 1129-30 (1984). Where an ambiguity or inconsistency in the provisions of a contract exists, or where one party in a contract has the discretion to exercise certain powers over the other party, the implied covenant of good faith and fair dealing will affect the interpretation of a contract to render the contract fair or to provide substance to each provision. California Lettuce Growers v. Union Sugar Co., 45 Cal. 2d 474 (1955); Walter E. Heller Western, Inc. v. Tecrim Corp., 196 Cal. App. 3d 149 (1987); April Enterprises v. KTTV, 147 Cal. App. 3d 805 (1983).

In the present case, the Plan could clearly be amended. The contract is not ambiguous or internally inconsistent. The covenant of good faith and fair dealing is not necessary to interpret the contract. The agreement grants an express right, namely the authority of the Committee and Warner to amend the Plan in any respect at any time. The required concurrence of both the Committee and Warner is an internal limitation on the exercise of the right to amend. The parties negotiating the agreement were sophisticated businessmen; if they wanted to ensure that the Plan would only be amended for certain reasons, they would have included such a provision.

The district court did not err in holding that under California law the Plan could be properly amended.

B. Did the district court err in finding as a matter of fact that the Plan had been amended?

Plaintiffs argue that the district court erroneously found that the Plan had been amended as a matter of fact. On a summary judgment motion, the court is not to make determinations of fact where there is a real dispute as to the existence of that fact. Fed.R.Civ.Pro. 56(c). Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-52 (1986). A grant of summary judgment is reviewed de novo. Darring v. Kinchloe, 783 F.2d 874, 876 (9th Cir. 1986).

Even though all credible inferences are to be made in favor of the nonmovant when considering a summary judgment motion, Anderson, 477 U.S. at 255, that party must introduce some evidence in opposition to the motion. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). Especially, where the nonmoving party will bear the burden of proof at trial, "Rule 56(e) ... requires the nonmoving party to go beyond the pleadings ... and designate 'specific facts showing that there is a genuine issue for trial.' " Id. at 324.

In the present case, plaintiffs would bear the burden of proving at trial that there was a breach of contract. Defendants introduced a document dated December 17, 1981, and established that it was an amendment to the Plan. In response to defendants' summary judgement motion and affidavits, plaintiffs have not introduced evidence showing that as a matter of fact the Plan had not been amended or that payments had not been made in accordance with the amended Plan. No dispute exists as to these material facts.

The district court's grant of summary judgment is AFFIRMED.