S t . Marys Bank v. Creme

• Court: District Court, D. New Hampshire
• Decided: March 12, 1998
• Docket: CV-96-292-M
• Status: Published

Opinion

S t . Marys Bank v . Creme CV-96-292-M 03/12/98 UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

S t . Mary’s Bank, Plaintiff, v. Civil N o . 96-292-M

Creme, Inc. individually and as General Partner of Seventh RMA Partners, L.P., and Seventh RMA Partners, L.P. individually, Defendants, and

Seventh RMA Partners, L.P., Counterclaim Plaintiff, v.

S t . Mary’s Bank, Donald Evans, and Steven Wertz, Counterclaim Defendants.

O R D E R

The parties’ claims arise from the sale of a package of problem loans. Anticipating a suit by Creme, Inc. and Seventh RMA (“RMA”) Partners, L.P., who bought the loan package, S t . Mary’s Bank, who sold i t , brought a declaratory judgment action seeking a determination of the parties’ rights with respect to certain provisions of their Loan Sale Agreement. RMA filed counterclaims against S t . Mary’s and two of its officers, Donald Evans and Steven Wertz, alleging fraud, negligent

misrepresentation, and breach of contract. S t . Mary’s moves to dismiss RMA’s counterclaims as barred by particular provisions of the loan sale agreement. RMA objects arguing that the cited portions of the agreement do not bar its claims. For the reasons that follow, S t . Mary’s motion to dismiss is denied with respect

to RMA’s claims for fraud and is granted with respect to the

claims for negligent misrepresentation and breach of contract.

DISCUSSION

A motion to dismiss under Federal Rule of Civil Procedure

12(b)(6) is one of limited inquiry, focusing not on "whether a

plaintiff will ultimately prevail but whether the claimant is

entitled to offer evidence to support the claims." Scheuer v .

Rhodes, 416 U.S. 2 3 2 , 236 (1974). In considering a motion to

dismiss, the court accepts all well-pleaded facts as true and

resolves all reasonable inferences in favor of the nonmoving

party. Washington Legal Found. v . Massachusetts Bar Found., 993

F.2d 9 6 2 , 971 (1st Cir. 1993). Documents that are attached to a

complaint or are integral to the complaint, although not

attached, may be considered as part of the pleadings in deciding

a motion to dismiss. See Watterson v . Page, 987 F.2d 1 , 3-4 (1st

Cir. 1993).

A. Fraud Claim S t . Mary’s moves to dismiss RMA’s fraud claim for failure to

plead fraud with sufficient particularity as required by Federal

Rule of Civil Procedure 9 ( b ) , and as precluded by release

provisions in the Loan Sale Agreement.

2 1. Rule 9(b) particularity.

The heightened pleading requirements imposed by Rule 9(b) 1

are intended to provide a defendant with fair notice of the claim

as well as to prevent improper use of allegations of fraud. Suna

v . Bailey Corp., 107 F.3d 6 4 , 68 (1st Cir. 1997). To that end,

Rule 9(b) requires that allegations of fraud “specify the time,

place and content of an alleged false representation.” Romani v .

Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir. 1991).

In support of its counterclaim for fraud, RMA has identified the allegedly fraudulent representations made with respect to

each allegedly defective loan. RMA alleges that the

misrepresentations were made by S t . Mary’s and two individual

defendants, Donald Evans and Steven Wertz, who are alleged to

have been bank officers at the time of the sale.2 RMA alleges

that Evans was the S t . Mary’s officer responsible for the RMA

sale and for the contents of the “due diligence files” and for

other representations and omissions by S t . Mary’s in connection

with the sale. As RMA’s allegations of fraud are sufficiently

detailed and specific to meet the pleading requirements of Rule

1 Rule 9(b) provides: (b) In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally. 2 At the hearing held on January 2 1 , 1998, counsel for RMA represented that it no longer intended to pursue claims against Steven Wertz. Therefore, those claims are considered withdrawn.

3 9 ( b ) , S t . Mary’s motion to dismiss for lack of particularity is

denied.

2. Individual liability.

Individuals may be liable for a corporation’s liabilities

and debts for fraud, see, e.g., Gautschi Auto Body Discount

Center, 139 N.H. 4 5 7 , 461 (1995), and individual corporate

officers may be liable for their own fraudulent activities, see,

e.g., Cohen v . Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994). St.

Mary’s has not shown that under New Hampshire law a cause of

action against corporate officers for their own fraud cannot be

maintained, as alleged by RMA. In fact it can.

3. Effect of release and disclaimers in the Agreement.

S t . Mary’s contends that the “Release of Seller” provision,

section 6.1, in the Loan Sale Agreement bars RMA’s fraud claim.

Section 6.1 provides as follows: Release of Seller. Buyer hereby releases and forever discharges Seller, its agents, servants, directors, officers, employees, successors, assigns and affiliates (all such persons being collectively referred to as the “Related Persons”), of and from any and all causes of action, claims, demands and remedies of whatsoever kind and nature that Buyer has or may in the future have against Seller or any Related Persons in any manner on account o f , arising out of or related to the Loan Assets purchased hereunder; provided, however, that such release and discharge shall not apply to any remedy against Seller arising out of or related to any Defective Loan Asset.

RMA contends that the release and remedies limitations

provisions, to the extent they would otherwise apply to its

4 claims, are unenforceable because the Agreement itself was

induced by S t . Mary’s fraudulent representations in the bid

package as to the value of the problem loans.

S t . Mary’s acknowledges that fraud in the inducement of an

agreement would ordinarily allow the defrauded party to void the

agreement under New Hampshire law. See, e.g., Manchester Mfg.

Acquisitions v . Sears, Roebuck, 802 F. Supp. 595, 602-03 (D.N.H.

1992). Nevertheless, S t . Mary’s points to an exception, under

Massachusetts law. A party is necessarily put on notice and may

not reasonably rely on representations when it signs an agreement

with provisions that are directly contradictory to

representations made prior to the agreement. See Turner v .

Johnson & Johnson, 809 F.2d 9 0 , 95-97 (1st Cir. 1986) (construing

Massachusetts l a w ) .

In Turner, J&J bought a thermometer business from plaintiff,

Turner, for a lump sum and royalties. Plaintiff alleged that J&J

misrepresented that it would actively market the thermometer,

which allegedly induced plaintiff to agree to sell the business

at a low price. Their written sale agreement, however, included

a clause explicitly stating that J&J had no obligation to market

the thermometer. The court held that a contract term is “flatly

contradictory” to previous oral representations should give

plaintiff pause: “[A] knowledgeable buyer should not sign a

contract that conflicts with his or her understanding of the

agreement.” Id. at 97-98. In contrast, the court held, an

ambiguous term, like an “as is” clause, leaves the agreement

5 undefined, to some extent, allowing plaintiff to reasonably

interpret the language to be consistent with prior

representations. Id. at 9 6 .

In this case, the release provision, taken in the context of

the entire Agreement, which includes seller’s representations in

section 3.1.1, does not directly contradict RMA’s alleged

understanding that the bid package represented S t . Mary’s true,

correct, and complete file on the loan properties. Thus, the

release and disclaimer in section 6.1 does not bar RMA’s fraud

claim.

B. Negligent Misrepresentation Claim

“‘One who, in the course of his business . . . supplies

false information for the guidance of others in their business

transactions, is subject to liability for pecuniary loss caused

to them by their justifiable reliance upon the information, if he

fails to exercise reasonable care or competence in obtaining or

communicating the information.’” Gray v . First NH Banks, 138 N.H.

279, 283 (1994)(quoting Restatement (Second) of Torts § 5 5 2 ) .

RMA asserts its negligent misrepresentation claim “in the alternative only to the extent the Defendants, or any of them,

did not know of the misrepresentations and material omissions

stated above [in the fraud claim].” RMA’s Answer at paragraph

107. To the extent the individual defendant, Donald Evans, did

not know of the alleged fraud, he is likely not liable for the

alleged fraudulent activities. See, e.g., Cohen, 25 F.3d at 1173

6 (corporate officers may be individually liable for fraud if they

have knowledge of or participate in i t ) . Since RMA argues only

its fraud and breach of contract claims in objecting to S t .

Mary’s motion to dismiss, it appears that RMA has abandoned its

negligent misrepresentation claim as to both defendants.

S t . Mary’s contends that the release at section 6.1 of the

Agreement bars both RMA’s negligent misrepresentation and breach

of contract claims. The effect of the release is considered in

the analysis of the breach of contract claim. To the extent that

RMA intends to maintain its negligent misrepresentation claim,

the same analysis applies to both claims since only fraud by S t .

Mary’s would allow RMA to avoid the consequences of the release

language in the Agreement.

C. Breach of Contract Claim

RMA alleges that S t . Mary’s breached section 3.1.3 of the

Agreement and breached its implied covenant of good faith and

fair dealing by providing an incomplete, incorrect and misleading

bid package for the loans that RMA purchased through the

Agreement. Since in section 3.1.3 S t . Mary’s represented that the written materials in the bid package are true and correct in

all material respects, RMA’s negligent misrepresentation, breach

of the duty of good faith and fair dealing, and breach of section

3.1.3 claims, all seem to be based on the same theory: S t . Mary’s

had a duty (or contractual obligation) to provide a true and

correct (and complete) bid package for the problem loans, and

7 breached that duty by providing misleading, incomplete, and false

information. See, e.g., See Centronics Corp. v . Genicom Corp.,

132 N.H. 133, 139 (1989) (implied good faith obligations in

contract formation “are tantamount to the traditional duties of

care to refrain from misrepresentation and to correct

subsequently discovered error”). S t . Mary’s moves to dismiss the

breach of contract claim on grounds that no misrepresentations

were made that would breach section 3.1.3 and that the release

language in the Agreement, section 6.1, bars the claim except for

the exclusive and limited remedy provided in section 5.1.

Interpretation of the language of a written agreement

presents a question of law. Bankeast v . Michalenoick, 138 N.H.

367, 369 (1994). The language used is to be given its reasonable

meaning and is to be construed in the context of the agreement as

a whole. Keshishian v . CMC Radiologists, 698 A.2d 1228, 1234

(N.H. 1997). Whether a contract term is ambiguous is also a

question of law. Holden Engineering and Surveying v . Pembroke

Realty Trust, 137 N.H. 393, 395 (1993). Contract language is

ambiguous if the parties could reasonably disagree as to the

meaning of particular language. Great Lakes Aircraft C o . v . City

of Claremont, 135 N.H. 2 7 0 , 288 (1992).

Section 3.1.3 provides: “All written materials provided in

the Bid Package are true and correct in all material respects.”

The “Bid Package” “means the information provided by Seller to

potential buyers relating to the purchase of the Loan Assets.”

Agreement at Article 1 , Definitions. S t . Mary’s interpretation

8 of that language to mean that it only represented that it would provide true and correct copies of materials for the bid package is unreasonable. Instead, the representation clearly applies to factual truth and accuracy of the materials in all “material respects.” The other contract provisions, such as the “as is” clause at section 2.10, the disclaimer found at section 3.2, and due diligence clause at section 4.3, do not preclude RMA’s interpretation of section 3.1.3 as a warranty of the truth and accuracy of the information in the bid package or its alleged reliance on the representation. The language of section 3.1.3 does not preclude RMA’s claim for breach.

S t . Mary’s also argues that the release in section 6.1 bars RMA’s breach claims. By its terms, however, the release in section 6.1 does not apply to “any remedy” against S t . Mary’s “arising out of or related to any Defective Loan Asset.” The Agreement provides in its definitions section that “Defective Loan Assets shall have the meaning indicated in Section 5.1 of this Agreement.” In section 5.1, the Agreement describes the process for withdrawal or repurchase of defective loan assets. Defective loan assets are those for which “either party discovers the breach of any of the representations and warranties set forth in Section 3.1 as to a particular Loan Asset listed in the Schedule of Loan Assets.” Section 5.1.1.

Section 5.1 provides a remedy for breach of the representations made in section 3.1. S t . Mary’s contends that section 5.1 is the exclusive remedy for breach of section 3.1.3

9 and bars RMA’s claims here as untimely. RMA interprets the section to limit its recourse to the remedy described, withdrawal or repurchase of loan assets, only for the sixty-day period and not to limit remedies for breaches discovered after the sixty-day period following closing. It is undisputed that RMA did not assert the alleged breaches of S t . Mary’s section 3.1.3 representations within the time allowed, either before the closing or within sixty days afterwards.

Section 5.1.2, which provides the recourse process for defective loan assets discovered within sixty days of closing, also provides, “Buyer shall not be entitled to any other remedy due to a breach by Seller of any one or more of the representations and warranties described in Section 3.1.” Section 3.2, disclaimer of warranties and representations, provides, “Except as otherwise provided in this agreement, all loan assets sold to Buyer under this agreement are sold and transferred without recourse, and without representations and warranties.” In addition, the “Limitation of Recourse” clause provides, “Buyer’s sole recourse against Seller in the event of a breach of any of the representations and warranties set forth in Section 3.1 shall be to require Seller to repurchase the Defective Loan Asset to which the breach relates in accordance with the provisions of Section 5.1.” Thus, considering the Agreement as a whole, all recourse for a claim alleging misrepresentation of information in the bid package is consistently limited to the remedy provided in section 5.1.

10 RMA’s version, that section 5.1 merely provides a limited remedy

for a limited period (sixty days), and an unlimited remedy

thereafter, and not that it provides the only remedy for breach

of section 3.1, is unreasonable.

Accordingly, section 5.1 is not ambiguous, and it operates

to bar RMA’s claim for breach of section 3.1.3 warranties.

Similarly, because RMA’s negligent misrepresentation claim and

claim for breach of the implied covenant of good faith and fair

dealing allege misrepresentations in the bid package (which is

warranted by section 3.1.3), to the extent either claim survives

the release in section 6.1, it does so as a claim alleging

defective loan assets that is limited by section 5.1. Therefore,

RMA’s breach of contract and negligent misrepresentation claims

are barred by either the release or the limited remedy provisions

of the Agreement and are hereby dismissed.

Conclusion

For the foregoing reasons, S t . Mary’s motion to dismiss

(document n o . 30) is granted with respect to RMA’s negligent

misrepresentation and breach of contract claims, and is denied with respect to RMA’s fraud claim.

SO ORDERED.

Steven J. McAuliffe United States District Judge

11 March 1 2 , 1998 cc: Kevin M . Fitzgerald, Esq. Scott F. Innes, Esq. Kevin J. Toner, Esq.