Opinion
IP 1:03-474-SEB-VSS
November 25, 2003
ENTRY GRANTING DEFENDANT'S MOTION TO DISMISS
This matter comes before the Court on Defendant Clayton Homes, Inc.'s Motion to Dismiss. Defendant argues that Plaintiff Brookview Financial, LLC has failed to plead its claims of actual fraud, fraudulent inducement, and constructive fraud with the particularity required to satisfy Fed.R.Civ.P. 9(b). For the reasons set forth below, we GRANT Defendant's Motion to Dismiss without prejudice. Plaintiff has 30 days to amend its complaint to comply with Rule 9(b).
Procedural and Factual Background
On January 31, 2003, Brookview Financial, LLC ("Brookview) filed its complaint against Clayton Homes, Inc. ("Clayton") in Owen Circuit Court alleging actual fraud, fraudulent inducement, and constructive fraud in connection with a loan agreement. Brookview removed the case to this court's Terre Haute division, pursuant to 28 U.S.C. § 1441; subsequently, both parties agreed to Clayton's Motion to Transfer Venue to the Indianapolis Division.
Brookview alleges that on February 1, 2001, it entered into a loan agreement with W.B. Dowdy, LLC ("Dowdy") for $733,430.00 to finance both Dowdy's purchase of manufactured homes from Clayton and the partial development of an Owen County housing community known as Brianwood Subdivision. Pl's Compl. ¶¶ 1-4. Brookview contends that before entering into the loan agreement, Charles Sharits ("Sharits"), a disclosed agent of Clayton's, made false representations to Brookview regarding Dowdy's financial ability to repay the loan and that Brookview reasonably relied upon them.Id. ¶¶ 4, 9, 10, 12, 18. Brookview further alleges that Sharits had other business dealings with Dowdy that were not disclosed.Id. ¶ 6-7. Moreover, Brookview argues that Sharits was operating under the express, implied, or apparent authority of Clayton and intended to wrongfully induce Brookview into executing the loan agreement, knowing that Dowdy was not financially able to repay Brookview. Id. ¶¶ 9, 13, 22. Because Clayton allegedly benefitted from the loan by Dowdy's purchase of eleven (11) homes from Clayton for $411,813.00, Brookview argues that it is entitled to recoup all funds paid by Brookview to Clayton with respect to purchases made by Dowdy, together with interest, reasonable attorneys' fees, court costs, and punitive damages. Id. ¶ 8, 15, 25.
Legal Analysis
Clayton moves to dismiss Brookview's claims arguing that Brookview failed to plead its allegations of fraud with the particularity required by Fed.R.Civ.P. 9(b). The Federal Rules of Civil Procedure prescribe a notice-based pleading system rather than a fact-based pleading system. Fed.R.Civ.P. 8; Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 168 (1993); Cook v. Winfrey, 141 F.3d 322, 327 (7th Cir. 1998). Generally, a complaint simply requires "a short and plain statement of the claims showing that the pleader is entitled to relief" rather than all the facts underlying a claim. Fed.R.Civ.P. 8(a)(2).
Rule 9(b), however, places more stringent pleading requirements on complaints alleging fraud and requires that "in all averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity." Because an accusation of fraud can destroy the goodwill of a business or a professional, a plaintiff is required to conduct a thorough investigation before filing his or her complaint so that the defendant's reputation is protected from unfair aspersions.Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992); Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999), cert. denied, 528 U.S. 874 (1999); Hirata Corp v. J.B. Oxford and Co., 193 F.R.D. 589, 592 (S.D.Ind. 2000).
A plaintiff satisfies the requirements of Rule 9(b) by alleging "the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Bankers Trust Co., 959 F.2d at 683; Wade v. Hopper, 993 F.2d 1246, 1250 (7th Cir. 1993); Bridgestone/Firestone, Inc., Tires Product Liability Litigation, No. IP 01-5252-C-B/S, 2002 WL 31689264, at *8 (S.D.Ind. Nov. 20, 2002); see also Grau Mill Development Corp. v. Colonial Bank Trust Co. of Chicago, 927 F.2d 988, 992-93 (7th Cir. 1991). In other words, "[t]his means the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990). The Seventh Circuit's consistent interpretation of the demands of Rule 9(b) obliges a plaintiff to sufficiently investigate his or her charge of fraud prior to filing a complaint to assure that the claim is not defamatory and extortionate but is responsible and supported.Ackerman, 172 F.3d at 469.
Clayton argues that Brookview has failed to allege "to whom Mr. Sharits made these misrepresentations, what Mr. Sharits said, when he said it, and how these misrepresentations induced Brookview to lend a sizable amount of money to Dowdy." Def.'s Mot. to Dismiss at 2. Brookview rejoins that it has satisfied the particularity requirements of pleading fraud by: (1) identifying Sharits as the person who made the misrepresentations; (2) alleging that Sharits failed to disclose his business relationship with Dowdy; and (3) alleging that he made various false and material representations to Brookview concerning Dowdy's financial ability to repay his obligations to Brookview. Pt.'s Mem. in Opp'n at 2-3; Pt.'s Compl. ¶ 18.
We do not find the requisite detail in the plaintiff's complaint for a properly pleaded fraud claim. The plaintiff states that "Sharits was involved in business dealings with Dowdy" that were undisclosed to Brookview. Pt.'s Compl. ¶¶ 6, 7. Count I, the actual fraud claim, states that "Sharits, a disclosed agent of Clayton, made fraudulent representations to Brookview which Brookview relied [on in] making the decision to enter into the Agreement." Id. ¶ 10. Count II, the fraudulent inducement claim, states that "Clayton's agent, Sharits, made various fraudulent representations to Brookview prior to Brookview entering into the Agreement." Id. ¶ 12. Finally, Count III, the constructive fraud claim, states that "Clayton's agent made various false and material representations to Brookview concerning the financial ability of Dowdy to repay his obligations to Brookview, which Brookview relied on." Id. ¶ 18.
While these statements identify who made the alleged misrepresentations, they otherwise omit vital information required by Rule 9(b) such as when, where, and how they were communicated to Brookview. See Bankers Trust Co., 959 F.2d at 683; Wade, 993 F.2d at 1250; Grau Mill, 927 F.2d at 992-93; DiLeo, 901 F.2d at 627. Moreover, aside from a reference to general subject matter, i.e., Dowdy's ability to repay the loan, there is no sense of what was said in order to understand how the statements might have caused Defendant to rely upon them.See id. Because all three counts fail to satisfy Rule 9(b) for the same reasons, we address their inadequacies together.
Brookview alleges that the misrepresentations were made "prior to" its entering into the loan agreement. This does not adequately identify when the misrepresentations were made. This court has previously found that an assertion that a fraud occurred over a period of six months in a specific year is insufficient for the purpose of Rule 9(b). Hirata, 193 F.R.D. at 598. We also have regarded a statement made in the course of a three-month negotiation to lack specificity. GL Industries of Michigan, Inc. v. Forstmann-Little, 800 F. Supp. 695, 702 (S.D.Ind. 1991). To allow pleadings to rest on the broad assertion that the misrepresentations were made "prior to" their entering into the loan agreement would be to stray too far from the Seventh Circuit's requirements of what it means to plead fraud with particularity.
In addition, Brookview has made no attempt to allege where and how the misrepresentations were made. See Bankers Trust Co., 959 F.2d at 683; Wade, 993 F.2d at 1250; Grau Mill, 927 F.2d at 992-993; DiLeo, 901 F.2d at 627. For instance, the plaintiff's complaint might specify whether Sharks' misrepresentations were made in writing, by telephone, by email, or in person. Since the complaint alleges that Sharits made various misrepresentations to Brookview, it could be inferred that Plaintiff has knowledge of the source of these misrepresentations and the method by which Sharits communicated them. A properly pleaded fraud complaint must contain these details.
Although Brookview's assertion that Sharits did not reveal his business dealings with Dowdy may meet the requirements of Rule 9(b), the allegation that he made fraudulent representations "concerning the financial ability of Dowdy to repay his obligations to Brookview" does not sufficiently inform Clayton of its purported role in the fraud. The Seventh Circuit has found that the specific content of the false representations must be pleaded. Grau Mill, 927 F.2d at 993, Although Brookview need not go so far as to plead facts showing that the representations were actually false, it must provide more detail with regard to what Sharits said about Dowdy's ability to repay his debt to Brookview.
The heightened pleading standard under Rule 9(b) may be relaxed when the necessary details are inaccessible to the plaintiff if they rest exclusively within the defendant's knowledge, such as in cases of corporate fraud. See Katz v. Household Int.'l. Inc., 91 F.3d 1036, 1040 (7th Cir. 1996); Jepson, Inc. v. Makita Corp., 34 F.3d 1321, 1328 (7th Cir. 1994). However, a review of Brookview's complaint suggests that Brookview has access to all the facts necessary to provide the required detail. Brookview alleges that Sharits made false representations to Brookview concerning Dowdy's financial situation to induce Brookview to grant Dowdy a loan. Therefore, Brookview must know when, where, and how Sharits said this, as well as what Sharits specifically said.
Given that Brookview has failed to meet the pleading standard set by Rule 9(b), we shall permit Brookview to amend its fraud claims to comply with Rule 9(b), by alleging: (1) the day or days when Sharits made the misrepresentation; (2) where the misrepresentations were received; (3) the method by which they misrepresentations were communicated; and (4) what Sharits specifically said about Dowdy's financial ability to repay the loan. See Hirata, 193 F.R.D. at 598-99; Wright Miller § 1300 ("An insufficient allegation of fraud or mistake is subject to the liberal amendment provisions of Rule 15.");cf. Fed.R.Civ.P. 15(a). Clayton's Motion to Dismiss isGRANTED without prejudice and Brookview may, within 30 days of the date of this Entry, amend its complaint to comply with the particularity requirements of Rule 9(b) to support its claim for damages. Failure to amend the complaint within the allotted time will result in a dismissal with prejudice.