Summary
explaining that violation of a contractual duty to disclose gives rise to a claim for breach of contract, not fraud
Summary of this case from Singhal & Co. v. VersaTech, Inc.Opinion
Civil Action No. CCB-08-288.
February 9, 2009
MEMORANDUM
Now pending before the court is a motion to dismiss Count IV of a complaint brought by plaintiff Len Stoler, Inc. ("LSI) for failure to state a claim, filed by defendant National Auto Care Corporation ("NAC"). See Fed.R.Civ.P. 12(b)(6). In Count IV, LSI alleges intentional misrepresentation with respect to the execution of a contract between it and NAC, in violation of Maryland law. The issues in this case have been fully briefed and no hearing is necessary. For the reasons stated below, the defendant's motion to dismiss Count IV will be granted.
BACKGROUND
The following facts are presented in the light most favorable to the plaintiff. In 1997, NAC, an Ohio-based corporation, approached Maryland-based LSI through NAC's agent Richard Blanken to solicit its participation in certain extended warranty and insurance arrangements offered by NAC. Over the course of the next seven years, LSI entered into three contracts with NAC: (1) a Used Vehicle Certification Program Dealer Agreement, signed on November 21, 1997 ("Agreement 1"); (2) a Vehicle Service Contract Profit Sharing Agreement, signed on April 20, 1998 ("Profit Sharing Agreement"); and (3) a Service Contract Sales Agreement, signed on August 13, 2004 ("Agreement 3"). Under the terms of Agreements 1 and 3, NAC would underwrite and administer limited warranties and insurance for LSI's used vehicles, enabling LSI to market its used vehicles as "certified." In return, LSI would remit to NAC at least twenty used vehicle certifications per month. Under the terms of the related Profit Sharing Agreement, NAC agreed to provide 100% of the "profits" on the insurance premiums it collected from these arrangements to LSI. Profits were defined in that Agreement as "earned premiums less claims incurred, and allocated claims expenses, and bank fees and charges, and excise and premium taxes, if any, and all other expenses payable directly on the premiums." (Compl. Ex.2, Profit Sharing Agreement ¶ 4.)
During the negotiations for the Profit Sharing Agreement, NAC represented to LSI that, if it entered into the Agreement, it stood to receive roughly $575 per month in profits on NAC insurance premiums, as evidenced by NAC's summary of the profit sharing agreement ("Summary"). ( See Compl. Ex. 5.) This figure was reached by projecting an average monthly premium of $800, to which $40 per month from 5% investment income would be added, and from which insurance claims averaging $130 per month would be deducted, as well as an "Administrative Fee" of $135 for NAC's "expenses, profits, [and] reinsurance." ( Id.) During the negotiations, NAC allegedly made an oral promise, through its agent Blanken, that it would deduct this $135 amount as a fixed, flat fee. (Compl. ¶ 23; Compl. Ex. 5.) The Summary sent to LSI was worded so as to be clear that the $575 per month profit figure was a projection, not a promise. For instance, it stated that the figures used to calculate LSI's expected profits "could be more or less than" the ones used in the Summary. (Compl. Ex. 5.) It also stated that the insurance premium figure, claim cost figure, and claim percentage it used in its calculations were averages. ( Id.) Nevertheless, the Summary did create the impression that — if all went as planned — LSI could make millions of dollars.
The Summary's "conclusion" read: "If the dealer sold 150 contracts per month and left all the funds in the bank for five years, and when all the contracts had paid out, there would be a whopping 5.2 MILLION IN THE BANK, IN CASH!!!!!!!!!!!!!!!" ( Id. (emphasis in original)).
For several years, LSI alleges it fully complied with its obligations under these three agreements, selling approximately 8,700 contracts for NAC and performing all covered repairs in accordance with the agreements. However, LSI alleges that NAC breached these agreements in a variety of ways during this period, and so it filed suit against NAC on February 1, 2008, alleging three counts of breach of contract. In this suit, it also alleges that NAC effected an intentional misrepresentation (Count IV) by failing to disclose "information concerning Administrative Fees and other expenditure [sic] deducted from gross amounts received from LSI's customers on each covered contract, thereby artificially lowering the `profit' from which LSI could realize a disbursement." (Compl. ¶ 35.) It further alleges that this failure to disclose amounted to a "deliberate[] conceal[ment]" of material facts, facts that it knew would have led to LSI's terminating the agreements if LSI had learned of them. (Compl. ¶ 36.) Finally, LSI seeks a petition for accounting (Count V), in order to ascertain the exact amount of unremitted profits it is owed and be compensated accordingly.
LSI does not specify when the alleged breaching began, though the fact that it entered into a third agreement with NAC in 2004 suggests that it was not aware of any breach until after that date.
Specifically, LSI alleges that NAC breached Agreements 1 and 3 (Counts I III) by "[f]ailing to properly account for premiums received from LSI customers"; "[f]ailing to adhere to agreed to procedures concerning the payment for covered services"; and failing to adhere to agreed procedures concerning "[d]etermination of covered services." (Compl. ¶¶ 17 31.) It alleges that NAC breached the Profit Sharing Agreement (Count II) by "fail[ing] and refus[ing] to remit LSI's share of the profits arising from these service contracts"; raising the Administrative Fee it charged without authorization; failing to properly account for its revenues and expenditures under each service contract; and issuing payment for non-covered repairs (thereby reducing potential profit for LSI from the insurance premiums). (Compl. ¶¶ 25-26.)
NAC now seeks to dismiss Count IV on the grounds that its allegations are a mere recasting of the breach of contract allegations contained in Counts I through III and are moreover insufficiently pleaded under Federal Rule of Civil Procedure 9(b) ("Rule 9(b)"). Accordingly, NAC asserts that Count IV fails to state a claim upon which relief can be granted and so should be dismissed.
ANALYSIS
"[T]he purpose of Rule 12(b)(6) is to test the sufficiency of a complaint and not to resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Presley v. City of Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006) (quoting Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999) (internal quotation marks and alterations omitted). When ruling on such a motion, the court must "accept the well-pled allegations of the complaint as true," and "construe the facts and reasonable inferences derived therefrom in the light most favorable to the plaintiff." Ibarra v. United States, 120 F.3d 472, 474 (4th Cir. 1997). To survive a motion to dismiss, the factual allegations of a complaint "must be enough to raise a right to relief above the speculative level, . . . on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Bell Atlantic Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1965 (2007) (internal citations omitted). Thus the plaintiff's obligation is to set forth sufficiently the "grounds of his entitlement to relief," offering more than "labels and conclusions." Id. (internal quotation and alterations omitted); see Young v. City of Mount Ranier, 238 F.3d 567, 577 (4th Cir. 2001) ("the presence [in a complaint] . . . of a few conclusory legal terms does not insulate a complaint from dismissal under Rule 12(b)(6) when the facts alleged in the complaint cannot support" the necessary legal finding).
A plaintiff asserting intentional misrepresentation must sufficiently plead the following five elements in order to survive dismissal:
(1) the defendant made a false representation to the plaintiff; (2) the falsity was either known to the defendant or the representation was made with reckless indifference as to its truth; (3) the misrepresentation was made for the purpose of defrauding plaintiff; (4) the plaintiff relied on the misrepresentation and [had] the right to rely on it; and (5) the plaintiff suffered compensable injury resulting from the misrepresentation.Jenkins v. PBG, Inc., 268 F. Supp. 2d 593, 597 (D. Md. 2003) (citing Nails v. S R, Inc., 639 A.2d 660, 668 (1994)). Because an intentional misrepresentation claim is a type of fraud claim, see B.N. v. K.K., 538 A.2d 1175, 1182 (Md. 1988), it is also subject to the heightened pleading standards of Rule 9(b). See Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 783-84 (4th Cir. 1999); Adams v. NVR Homes, Inc., 193 F.R.D. 243, 250 (D. Md. 2000). Rule 9(b) requires a plaintiff to plead "with particularity the circumstances constituting fraud." Fed.R.Civ.P. 9(b). These "circumstances" include "the time, place, and contents of . . . false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby." Harrison, 176 F.3d at 784 (quoting 5 Charles Alan Wright Arthur R. Miller, Fed. Prac. Proc. § 1297 (2d ed. 1990)). "Mere allegations of `fraud by hindsight' will not satisfy the requirements of Rule 9(b)." Id. (quoting Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204, 209 (4th Cir. 1994)). Fraud allegations that fail to comply with Rule 9(b) warrant dismissal under Rule 12(b)(6). Id. at 783 n. 5.
LSI has failed to sufficiently plead an intentional misrepresentation claim in several respects. First, LSI has failed to sufficiently plead the first element of the claim, namely that NAC made a false representation to it. LSI contends that NAC engaged in false representation in at least two ways: first, by failing to disclose "information concerning Administrative Fees and other expenditure [sic] deducted from gross amounts received from LSI's customers on each covered contract, thereby artificially lowering the `profit' from which LSI could realize a disbursement" (Compl. ¶ 35); second, by "deliberately conceal[ing] facts material to the accounting of each transaction" (Compl. ¶ 36). As an initial matter, concealments and failures to disclose usually are not treated as false representations unless there was a separate duty to disclose. See Estate of White ex rel. White v. R.J. Reynolds Tobacco Co., 109 F. Supp. 2d 424, 428 (D. Md. 2000) (concealment may be treated as fraudulent misrepresentation in Maryland if "there exists a separate duty of disclosure to plaintiff by defendant") (quoting Finch v. Hughes Aircraft Co., 469 A.2d 867, 888 (Md.Ct.Spec.App. 1984); Morris v. Osmose Wood Preserving, 667 A.2d 624, 638 n. 12 (Md. 1995) ("Non-disclosure . . . has never been sufficient to establish fraud, in any context, absent some duty to disclose."). Given that all of the contracts in dispute were arm's-length contracts between two corporations, there was no general duty to disclose here. See Polson v. Martin, 180 A.2d 295, 298 (Md. 1962); see also Architectural Sys., Inc. v. Gilbane Bldg. Co., 779 F. Supp. 820, 821-22 (D. Md. 1991).
LSI asserts, both in its complaint and in its Response, that LSI had a "duty to disclose to the Plaintiff all facts material to a full accounting of all transactions arising under each of the agreements between the parties." (Compl. ¶ 34.) This is true to a certain extent, but only as to LSI's second allegation of false representation (Compl. ¶ 36), and only then because of a clause in the Profit Sharing Agreement requiring it. No full accounting of transactions could be expected before performance on the contracts began; accordingly any duty to disclose facts material to such accounting was created by contract and arose during performance. Therefore, any "deliberate[] conceal[ment of] facts material to the accounting of each transaction" on NAC's part amounts to a breach of contract, not a fraud. Indeed, the allegations in LSI's breach of contract claims assert essentially the same type of nondisclosure. ( See Compl. ¶¶ 17, 26, 31.)
In the Profit Sharing Agreement, NAC did agree to provide LSI with quarterly accounting information that included "premium, loss ratio and investment income reports and a copy of any monthly or quarterly reports provided by the financial institution selected by Dealer [LSI] to hold such premiums." (Compl. Ex. 2, Profit Sharing Agreement ¶ 9.)
It may be that LSI intends to state a fraud in the inducement claim as to the nondisclosure of Administrative Fees alleged in the complaint. (Compl. ¶ 35.) As to this allegation, the court recognizes that there are instances where nondisclosure may be fraudulent despite the lack of a separate duty to disclose. See, e.g., United States v. Gray, 405 F.3d 227, 235-36 (4th Cir. 2005). However, it is far from clear that NAC actually failed to disclose the aforementioned information. "[I]nformation concerning . . . expenditure [sic] deducted from gross amounts received from LSI's customers on each covered contract" (Compl. ¶ 35) was set out in detail in the Profit Sharing Agreement, where NAC described deductions from gross amounts as including "claims incurred, and allocated claims expenses, and bank fees and charges, and excise and premium taxes, if any, and all other expenses payable directly on the premiums." (Compl. Ex.2, Profit Sharing Agreement ¶ 4.) "[I]nformation concerning Administrative Fees" (Compl. ¶ 35) was described in the Summary, where these were said to include "expenses, profits, and reinsurance," and their total amount per month was listed as $135. (Compl. Ex. 5.) LSI admits knowing the Summary to be precisely that, and despite the Summary's explicit qualifications of its information, particularly dollar amounts, LSI appears not to have asked for further information before entering into the related contracts with NAC. Given that the precise amounts to be extracted from each premium could not have been forecasted in advance, it is unlikely that more detailed information could have been provided reliably.
Furthermore, if this court were to find nonetheless that NAC's nondisclosure of more complete information about its Administrative Fees and other deductions constituted a false representation, LSI still fails on the second element. In order for a false representation to be actionable, it must be known to be false when made. See Heritage Oldsmobile-Imports v. Volkswagen of America, Inc., 264 F. Supp. 2d 282, 291 (D. Md. 2003) (describing fraudulent misrepresentation as involving a representation that is "false at the time it is made"). Therefore, LSI must put forward evidence suggesting that when NAC failed to disclose the fee it would eventually charge and deductions it would eventually make, it did so knowingly. Unfortunately, LSI has done no more than provide bare allegations that this was the case, making its pleading as to this fraud element insufficient. Id.; see also Biktasheva v. Red Square Sports, Inc., 366 F. Supp. 2d 289, 296 (D. Md. 2005).
Indeed, LSI has failed to point to any specific instance of nondisclosure or concealment during negotiations for its contracts with NAC. In this regard, LSI also has failed to meet the "time" and "contents" pleading requirements of Rule 9(b).