MEMORANDUM
RICHARD STAIR JR., Bankruptcy JudgePage 2
This adversary proceeding is before the court upon Construction Design and Management, Inc.'s Complaint to Determine Dischargeability of Debt (Complaint) filed by the Plaintiff on September 11, 2009, asking the court to award it a nondischargeable judgment against the Defendant pursuant to 11 U.S.C. § 523(a)(6) (2006) in the amount of $539,700.00. The trial was held on July 19, 2010. The record before the court consists of nine exhibits introduced into evidence and the testimony of four witnesses, Denise Simmons, Mark Matlock, Lewis P. Snyder, and the Defendant.
This is a core proceeding. 28 U.S.C. § 157(b)(2)(I) (2006).
I
On November 9, 2006, the Defendant, in his capacity as "owner" of Reveiz Gibbs, LLC, a developer, entered into a Standard Form of Agreement Between Owner and Contractor (Contractor Agreement) with the Plaintiff, a general contractor, for the construction of a condominium development in Sevier County, Tennessee, known as Wisteria Point Condominium Development (Wisteria Point Condominium Project), at a "contract sum" of $3,368,585.00. TRIAL EX. 2. Pursuant to the Contractor Agreement, Reveiz Gibbs, LLC excavated the site, receiving a credit against the amount owed, but all remaining work and all materials were to be provided by the Plaintiff. To fund the construction of the Wisteria Point Condominium Project, Reveiz Gibbs, LLC, the Defendant, and H. Harry Gibbs entered into a Construction Loan Agreement with Tennessee State Bank. TRIAL EX. 1. As security for the construction loan, Reveiz Gibbs, LLC executed a Deed of Trust, granting Tennessee State Bank a lien against real property at 224 Maggie Mack Lane, Sevierville, Tennessee. The construction loan proceeds were the primary source of payment to the Plaintiff for labor and materials, and at various times, the Plaintiff requested draws against the loan proceeds through the Defendant and Reveiz Gibbs, LLC. See COLL. TRIAL EX. 4. After a draw was requested and following approval, Tennessee State Bank would deposit the requested amounts into a bank account in the name of Reveiz Gibbs, LLC.
As it worked on construction of the project, the Plaintiff submitted eight draw requests to Reveiz Gibbs, LLC which were promptly paid to the Plaintiff once they were funded by Tennessee State Bank. On March 13, 2008, the Plaintiff requested draw #9 in the amount of $189,982.80. After the request was funded by Tennessee State Bank, Reveiz Gibbs, LLC paid only $49,982.00 to the Plaintiff. Following nonpayment of the entirety of the requested draw #9, Mr. Matlock, the president and owner of the Plaintiff, met with the Defendant, who acknowledged using the proceeds for other projects and made a partial payment of approximately $50,000.00 to the Plaintiff. The Plaintiff continued performance and was paid accordingly under the Contractor Agreement through the summer of 2008, when it was not paid draws #14 and #15 in the respective amounts of $373,956.30 and $107,567.10, when requested, precipitating a meeting with Tennessee State Bank concerning Reveiz Gibbs, LLC's nonpayment.
The Defendant filed the Voluntary Petition commencing his case under Chapter 7 on January 15, 2009, and the Plaintiff filed the Complaint initiating this adversary proceeding on September 11, 2009, averring that the Defendant was under contractual and statutory obligations to use the construction loan proceeds only for that purpose and that he maliciously and willfully converted $539,700.00 held by Reveiz Gibbs, LLC in constructive trust and for the benefit of the Plaintiff, justifying a judgment in that amount and a determination of nondischargeability. The Defendant denies the Plaintiff's allegations, arguing that he did not maliciously or willfully convert funds.
II
The Plaintiff seeks a judgment against the Defendant along with a determination that the judgment is nondischargeable under 11 U.S.C. § 523, which, as relevant to this adversary proceeding, provides that "[a] discharge under section 727, . . . does not discharge an individual debtor from any debt — (6) for willful and malicious injury by the debtor to another entity or to the property of another entity[.]" 11 U.S.C. § 523(a) (2006). Courts construe § 523(a) liberally in favor of debtors and strictly against the party seeking a determination of nondischargeability, who also bears the burden of proving the necessary elements by a preponderance of the evidence. Grogan v. Garner, 111 S. Ct. 654, 661 (1991); Rembert v. AT T Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998). Additionally, the bankruptcy court possesses both the jurisdiction and the authority not only to adjudicate the Plaintiff's claims but to award any necessary damages as measured by state law. See Haney v. Copeland (In re Copeland), 291 B.R. 740, 759 (Bankr. E.D. Tenn. 2003) (citing Longo v. McLaren (In re McLaren), 3 F.3d 958, 965 (6th Cir. 1993)).
In order to be successful under § 523(a)(6), the Plaintiff must prove the existence of "a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury[,]" Kawaauhau v. Geiger, 118 S. Ct. 974, 977 (1998), and that the Defendant either desired to cause the consequences of his actions or believed with reasonable certainty that such consequences would occur. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir. 1999). "That a reasonable debtor `should have known' that his conduct risked injury to others is simply insufficient. Instead, the debtor must `will or desire harm, or believe injury is substantially certain to occur as a result of his behavior.'" Guthrie v. Kokenge (In re Kokenge), 279 B.R. 541, 543 (Bankr. E.D. Tenn. 2002) (quoting Markowitz, 190 F.3d at 465 n. 10). Additionally, "the injury must invade the creditor's legal rights." Steiner v. Best (In re Best), 109 Fed. Appx. 1, 6 (6th Cir. 2004). Accordingly, based upon Sixth Circuit authority, "unless the actor desires to cause consequences of his act, or . . . believes that the consequences are substantially certain to result from it, he has not committed a `willful and malicious injury' as defined under § 523(a)(6)." Markowitz, 190 F.3d at 464; Kokenge, 279 B.R. at 543 (citations omitted).
"Although the `willful' and `malicious' requirements will be found concurrently in most cases, the terms are distinct, and both requirements must be met under § 523(a)(6)." South Atlanta Neurology Pain Clinic, P.C. v. Lupo (In re Lupo), 353 B.R. 534, 550 (Bankr. N.D. Ohio 2006). "An act will be deemed `willful' only if it was undertaken with the actual intent to cause injury," Cash America Financial Services v. Fox (In re Fox), 370 B.R. 104, 119 (B.A.P. 6th Cir. 2007), requiring the court to "look into the debtor's mind subjectively" in order to determine whether the debtor intended to cause the consequences of his act or believed that the consequences were substantially certain to result from his act[.]" Monsanto Company v. Wood (In re Wood), 309 B.R. 745, 753 (Bankr. W.D. Tenn. 2004). On the other hand, "[a]n act is `malicious' if it is undertaken `in conscious disregard of one's duties or without just cause or excuse' . . . [and does] `not require ill-will or specific intent to do harm.'" Fox, 370 B.R. at 119 (quoting Wheeler v. Laundani, 783 F.2d 610, 615 (6th Cir. 1986)). "The conduct `must be more culpable than that which is in reckless disregard of creditors' economic interests and expectancies, as distinguished from . . . legal rights. [K]nowledge that legal rights are being violated is insufficient to establish malice. . . .'" Best, 109 Fed. Appx. at 6 (quoting In re Mulder, 306 B.R. 265, 270 (Bankr. N.D. Iowa 2004)). In other words, "[l]ack of excuse or justification for the debtor's actions will not alone make a debt nondischargeable under § 523(a)(6)." Lupo, 353 B.R. at 550. Nondischargeability under § 523(a)(6) requires proof that the Plaintiff was injured and the Defendant's deliberate or intentional actions caused its injury, but "[m]ere negligence is not sufficient to except a debt from discharge under § 523(a)(6)." Fox, 370 B.R. at 119.
Acts of conversion may serve the basis for a determination of nondischargeability under § 523(a)(6). Under Tennessee law, conversion "is the appropriation of tangible property to a party's own use and benefit in exclusion of defiance of the owner's rights." Thompson v. Thompson, 2009 Tenn. App. LEXIS 99, at *45, 2009 WL 637289, at *14 (Tenn. Ct. App. Mar. 12, 2009); see also Mammoth Cave Prod. Credit Ass'n v. Oldham, 569 S.W.2d 833, 836 (Tenn. Ct. App. 1977) (defining conversion as an intentional tort requiring proof that a party appropriated another's property for his own use by exercising dominion and control in exclusion or defiance of the owner's right to use and benefit from the property). "The main focus of the tort is the interference with an owner's property right [and t]he degree of this interference, as well as the impact on the property, determines whether there has been a conversion." Gen. Elec. Credit Corp. v. Kelly Dearing Aviation, 765 S.W.2d 750, 753 (Tenn. Ct. App. 1988). "[W]hile they do appreciably overlap, liability for conversion does not automatically equate with the existence of a nondischargeable debt under § 523(a)(6)." Superior Metal Prods. v. Martin (In re Martin), 321 B.R. 437, 441 (Bankr. N.D. Ohio 2004). Whether an act of conversion constitutes a willful and malicious injury within the scope of § 523(a)(6) depends upon whether the party intended to cause the harm or was substantially certain that such harm would occur. Sweeney v. Lombardi (In re Lombardi), 263 B.R. 848, 853 (Bankr. S.D. Ohio 2001).
The Defendant does not dispute that Reveiz Gibbs, LLC obtained a construction loan from Tennessee State Bank in order to fund the Wisteria Point Condominium Project or that the Plaintiff had performed the work on the project designated in draw request #9 made on March 13, 2008, in draw request #14 made on August 1, 2008, and in draw request #15 made on August 24, 2008. The Defendant likewise does not dispute that construction loan proceeds were paid from Reveiz Gibbs, LLC to Reveiz Homes, LLC and used for purposes other than payment to the Plaintiff and/or work performed on the Wisteria Point Condominium Project. He does, however, dispute the Plaintiff's averments that he was not entitled to a $55,638.02 developer fee and that Mr. Matlock was not aware that funds were being paid to Reveiz Homes, LLC to help pay for other projects, including projects in which Mr. Matlock was involved as well, with the understanding that the Plaintiff would be paid all monies it was due upon the closing of another project.
In prosecuting this adversary proceeding, the Plaintiff's primary argument has been that the construction loan proceeds were, in actuality, property of the Plaintiff, held in a constructive trust, and that the Defendant's use of those proceeds for other purposes than payment to the Plaintiff constituted conversion. Unquestionably, under the terms of the Construction Loan Agreement with Tennessee State Bank, Reveiz Gibbs, LLC was required to open a "Construction/Building Checking Account" into which funds from the loan would be deposited by the bank following submission and approval of draw requests and that Reveiz Gibbs, LLC was to "use this account solely for deposit and disbursement of funds associated with this construction project." TRIAL EX. 1 at ¶ 1.4; see also ¶¶ 1.8, 5.3. The Construction Loan Agreement additionally states that, at Tennessee State Bank's option, it was authorized to make disbursements and advances directly to the general contractor, subcontractors, mechanics, laborers, etc. into an appropriately designated special bank account, with any payments or disbursements charged against Reveiz Gibbs, LLC's loan account. TRIAL EX. 1 at ¶¶ 1.5, 1.6. The Plaintiff was not, however, a party to the Construction Loan Agreement and is not referenced anywhere within that document, nor does either the Construction Loan Agreement or the Contractor Agreement between the Plaintiff and Reveiz Gibbs, LLC provide that the loan proceeds are to be held "in trust" for the Plaintiff's benefit. Similarly, while the Construction Loan Agreement grants Tennessee State Bank a security interest in the real property upon which the Wisteria Point Condominium Project was to be built, no security interest of any kind was granted to the Plaintiff by either the Construction Loan Agreement or the Contractor Agreement. In reality, the Plaintiff was merely an unsecured creditor of Reveiz Gibbs, LLC pursuant to the breach of the Contractor Agreement. The Sixth Circuit has, however, held that "a breach of contract cannot constitute the willful and malicious injury required to trigger § 523(a)(6)." Best, 109 Fed. Appx. at 8 (citing In re Bullock-Williams, 220 B.R. 345, 347 (B.A.P. 6th Cir. 1998)).
Moreover, the Plaintiff has not sufficiently proved that the Defendant's actions rise to the level of "willful and malicious" as required by § 523(a)(6). To the contrary, the Defendant testified that in 2008, he held at least a minority interest in approximately ten development projects but that none of them was successful due to economic hardships. Upon running into financial difficulties in 2008, the Defendant testified that he asked Mr. Matlock if he could borrow a portion of the proceeds from draw #9 before doing so, that Mr. Matlock agreed that he could, and that he always intended to make complete payment to the Plaintiff for the work it had performed on the Wisteria Point Condominium Project. Even though Mr. Matlock disputed the Defendant's testimony that he knew the Defendant was using the money before transferring it to Reveiz Homes, LLC, Mr. Matlock did not dispute that he was aware soon after Tennessee State Bank disbursed draw #9 that Reveiz Gibbs, LLC had not paid the entire draw amount and that a portion had been used for other purposes. At trial, Mr. Matlock acknowledged that he did not contact Tennessee State Bank after draw #9. It was only after the Plaintiff did not receive payment on draws #14 and #15 for July and August that Mr. Matlock set up a meeting with bank officials concerning nonpayment of the draw requests, for which he prepared Trial Exhibit 8 to show the amounts he had determined were paid by Reveiz Gibbs, LLC to Reveiz Homes, LLC which were not related to the Wisteria Point Condominium Project and/or were not approved by him, his staff, or the bank. Mr. Matlock also testified that he was unaware of the Defendant's financial problems but that he believed, following draw #9, that the Defendant would pay the Plaintiff and relied upon the Defendant's promises based upon the long-standing personal and business relationship between the two men and because the Plaintiff had been routinely paid for its work prior to that time.
In summary, the Plaintiff has not proved by a preponderance of the evidence that it is entitled to a nondischargeable judgment against the Defendant for willful and malicious injury. A judgment consistent with this Memorandum will be entered.
Because the court finds that any judgment granted to the Plaintiff against the Defendant is dischargeable, it has not addressed the appropriate amount of any such judgment.
FILED: September 9, 2010
ve yearly increases.
The CHIP premiums were increasing because of the death spiral and would continue to rise until they were unaffordable.
The Court is satisfied that Clark has sufficiently pled individual reliance. Under the fraud prong, reliance is presumed where a plaintiff has pled facts establishing that a misrepresentation or omission was "material." In re Tobacco, 46 Cal. 4th at 327. Because materiality is normally a factual question, the Court will not attempt to resolve it here. See id. But, for the purpose of this motion to dismiss it is enough to note that non-disclosure of the death spiral is not "obviously unimportant" to a policy-holder's decision whether or not to renew her CHIP policy. See id. ("[M]ateriality is generally a question of fact unless the fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.") (internal quotations and citations omitted). The Court will deny Prudential's motion to dismiss the fraud prong of Clark's UCL claim.
iv. Treble Damages
The TAC sought treble damages, pursuant to California Civil Code Section 3345, for any violations of the UCL. The parties briefed and argued the issue. On August 9, 2010, Clark submitted a supplemental filing alerting the Court that the Supreme Court of California had determined in a recent case, Clark v. Superior Court, 2010 Cal. LEXIS 7624 (Cal. August 9, 2010), that an award of restitution under the UCL "is not subject to section 3345's trebling provision." Therefore, Clark withdrew her request for trebled damages. Accordingly, Prudential's motion to dismiss is granted with regard to that request for relief.
The plaintiff in Clark v. Superior Court is not in any way related to Beverly Clark, the plaintiff in the case instantly before this Court.
D. Clark's Common Law Fraud Claims
Prudential moves to dismiss Clark's Counts One and Two, for fraudulent misrepresentation and fraudulent omissions, arguing that she failed to state a claim under California's common law doctrines for those claims. Prudential argues that Clark's common law claims must fail under California law because (1) she has failed to plead an injury; and (2) her claims are barred by California's three-year statute of limitations because the delayed discovery rule cannot save her claim.
i. Injury
Prudential again argues that Clark has not pled sufficient facts to establish reliance and damages. Having already rejected that same argument in this Opinion, the Court need not revisit it. Clark's allegations sufficiently establish reliance and damages at the pleading stage.
See the discussion section of this Opinion, Part (C)(iii)(c).
ii. Statute of Limitations
As the Court previously stated, a statute of limitations defense is affirmative. Fed.R.Civ.P. 8(c). Therefore, it may only be resolved on a motion to dismiss if it is clear from the face of the complaint that the statute of limitations bars the claim. Oshiver v. Levin, Fishbein, Sedran Berman, 38 F.3d 1380, 1385 n. 1 (3d Cir. 1994). "[T]he uniform California rule is that a limitations period dependent on discovery of the cause of action begins to run no later than the time the plaintiff learns, or should have learned, the facts essential to his claim." Cleveland v. Internet Specialties W., Inc., 171 Cal. App. 4th 24, 31 (Cal. Ct. App. 2009) (citing Gutierrez v. Mofid, 39 Cal.3d 892, 897 (Cal. 1985)).
The TAC does not allege when Clark was able to discover the facts constituting her claim. In the context of Clark's UCL claim, the Court was able to extrapolate from the pleadings that as of 2005, and after exercising due diligence, Clark did not yet know that the block closure and resulting death spiral was the reason for the increasing premiums. Since the UCL has a four-year statute of limitations, the Court was able to make a preliminary determination based on the face of the TAC that the statute had not run before Clark filed her Complaint in 2008.
However, the Court is unable to make the same determination in this context because the statute of limitations for fraud claims in California is three years. It is less clear from the TAC whether Clark's fraud claims may be sheltered by the discovery rule. Whether the rule applies to Clark's fraud claim will involve a factual determination that the Court is not equipped to make at this stage in the litigation. Prudential's motion to dismiss Clark's fraud claims is denied.
E. Paul's Common Law Fraud Claims
Prudential argues that Paul's claims for fraudulent misrepresentation and omissions under Indiana law should be dismissed because (1) he has failed to plead an injury; (2) he cannot establish that Prudential owed him a fiduciary duty to disclose that it had closed the CHIP block; (3) he cannot establish misrepresentation because contract terms cannot constitute fraud absent a then-existing intention not to honor the contract. The parties agree that Indiana law applies to Paul's fraudulent misrepresentation and omissions claims. The misrepresentation claim in Indiana law would be one for "actual fraud." Under Indiana law, fraudulent omissions can give rise to a claim for "constructive fraud" or "fraudulent concealment."
The elements required to assert a cause of action for actual fraud are: (1) a material misrepresentation of past or existing fact; (2) the representation was false; (3) the representation was made with knowledge or reckless ignorance of its falsity; (4) the complaining party relied on the representation; and (5) the representation proximately caused the complaining party's injury.Wells v. Stone City Bank, 691 N.E.2d 1246, 1250 (Ind. Ct. App. 1998).
"Constructive fraud arises by operation of law when there is a course of conduct which, if sanctioned by law, would secure an unconscionable advantage, irrespective of the actual intent to defraud." Id. at 1250. Under Indiana law, a constructive fraud claim is comprised of five elements: (1) a duty existing by virtue of the relationship between the parties; (2) representations or omissions were made in violation of that duty; (3) reliance thereon by the complainant; (4) injury to the complainant as a proximate result thereof; and (5) the gaining of an advantage by the party to be charged at the expense of the complainant. Reginald Martin Agency, Inc. v. Conseco Med. Ins. Co., 478 F. Supp. 2d 1076, 1091 (S.D. Ind. 2007) (citing Siegel v. Williams, 818 N.E.2d 510, 516 (Ind. Ct. App. 2004)).
There is significant overlap between fraudulent concealment claims and constructive fraud, but the elements differ slightly. Reginald Martin, 478 F. Supp. 2d at 1091. The elements of a fraudulent concealment claim are (1) the wrongdoer had a duty to disclose certain facts to another; (2) it knowingly failed to do so; and (3) the other justifiably relied upon such non-disclosure to his detriment. De Voe Chevrolet-Cadillac, Inc. v. Cartwright, 526 N.E.2d 1237, 1240 (Ind. Ct. App. 1988).
i. Injury
Prudential argues that Paul has not asserted an injury. In support of its argument, Prudential asserts that "the basic premise of plaintiffs' death spiral theory is that non-disclosure of the block closure can injure a party if, when premiums rise, the policyholder cannot simply buy a different policy due to intervening pre-existing medical conditions." (Def.'s Br. in Opp'n to Mot. to Dismiss SAC 20.) (internal quotations omitted). Having narrowed Paul's claims to only the pre-existing conditions issue, Prudential correctly asserts that Paul did not claim that he personally suffered from a pre-existing condition that prevented him from obtaining alternative insurance when the CHIP policy became unaffordable.
In asserting this argument, Prudential fails to recognize that the TAC asserts that Paul was injured by the failure to disclose the death spiral in that it caused him to pay higher premiums than he otherwise would have if he had sought insurance from a policy that was not in a death spiral. Under Indiana law, "[p]roximate cause exists when there is some direct relation between the injury asserted and the injurious conduct alleged."Ruse v. Bleeke, 914 N.E.2d 1, 10 (Ind. Ct. App. 2009). Paul's allegations are sufficient to satisfy this standard for proximate cause at the pleading phase.
ii. Duty to Disclose
In support of his claims for fraudulent concealment, constructive fraud, and actual fraud, Paul posits two principal theories giving rise to an alleged duty, on Prudential's part, to disclose the block closure and resulting death spiral: (1) a misleading partial disclosure gave rise to a duty to disclose; or (2) a special relationship between Paul and Prudential gave rise to a duty.
Prudential does not challenge Paul's partial disclosure theory, except to argue that "it duplicates Paul's misrepresentation claim, rather than supporting a separate omission claim." (Def.'s Reply Br. in Opp'n to Mot. to Dismiss SAC 14.) The misleading partial disclosure theory is rooted in the principle that once a defendant undertakes "to disclose facts within his knowledge, he [had to] disclose the whole truth without concealing material facts." Thompson v. Best, 478 N.E.2d 79, 84 (Ind. Ct. App. 1985). The courts have allowed this theory to support claims for all three causes of action — actual fraud, constructive fraud, and fraudulent concealment. See, e.g., Kiesling v. Kiesling, 546 F. Supp. 2d 627, 639 (N.D. Ind. 2008) (applying the partial disclosure theory to claims for constructive fraud and actual fraud). Paul supports the misleading partial disclosure theory by alleging that the letters from Prudential representing after the block closure that the only reasons for the premium increases were the policyholder's age and the general rise in medical costs constituted a misleading partial disclosure. The Court sees no reason why Paul cannot proceed on parallel causes of action at this stage in the litigation, so the Court will allow each of the fraud claims, insofar as they are based the theory of misleading partial disclosure — to survive this motion to dismiss. Prudential's motion to dismiss is denied to the extent that it challenges the misleading partial disclosures in the letters and other communications as the basis for Paul's fraud claims.
The Court will turn now to the theories based on Prudential's relationship with Paul. Prudential asserts that in Indiana, (1) no special relationship automatically exists between an insurer and its insured; and (2) the factors that could give rise to such a relationship are not satisfied here. In support of its argument that no special relationship existed between Paul and Prudential, Prudential cites three cases — Am. Family Mut. Ins. Co v. Dye, 634 N.E.2d 844, 848 (Ind. Ct. App. 1994), Filip v. Block, 879 N.E.2d 1076 (Ind. 2008), and Grow v. Indiana Retired Teachers Cmty., 271 N.E.2d 140, 142-43 (Ind. Ct. App. 1971). The Court is not convinced by Prudential's arguments premised on these three cases that dismissal of the special relationship theory of recovery is warranted because all of these cases arose in contexts that are inapposite to the situation currently before the Court.
Although Prudential represented in its brief that there is no fiduciary-like duty that arises merely by virtue of the relationship between an insurer and its insured, the cases it cites to support that proposition actually hold that there may be a special relationship between an insurance agent and the insured and do not address the more general relationship between an insurance company and the insured. The Court has not found a general definition of the relationship between the insured and its insurance company in any of the cases Prudential cited.
The standards in Dye and Filip are specifically tailored to the relationship between an insured and his insurance agent, who, for the purpose of certain interactions is deemed under Indiana law to become an agent of the insured, which gives rise to specific fiduciary duties. In the present matter, Paul asserts that the omissions were made to him in form letters and in the insurance contract. He has not alleged that he had some special relationship with an insurance agent. Therefore, Prudential's citation to cases in which the relevant relationship was between an insured and his insurance agent are inapposite here.
The third case that Prudential cites also deals with the "special relationship" issue in a context-specific analysis that does not implicate an insured-insurer relationship in any sense. In Grow, a nonprofit Indiana corporation operating a retirement home represented to a retired woman that it could provide lifetime care at the home for which the monthly fee at the time was $150. A year after the retiree entered into the contract, the monthly charge was raised to $256, in part because the retirement home was not fully occupied. The retiree asserted a fraud claim, based on a duty to disclose that the monthly fee at the time she moved into the home was based on an assumption of full occupancy. She asserted three legal theories in support of the alleged duty: (1) the relationship of trust and confidence, (2) the fact that the Corporation had superior knowledge, and (3) the fact that the Corporation had made representations about the monthly service charge which distracted her attention from the fact that the monthly service charge was based upon an assumed rate of full occupancy rather than upon the actual occupancy. The Indiana Court of Appeal found that no special relationship existed under case law asserting a special relationship based on age or illness because the plaintiff was not too aged or infirm to understand the contract. The Court of Appeal also found that the retirement home did not have superior knowledge, since it had genuinely believed that the monthly fee was correctly computed and would not substantially change. Finally, even if a duty to disclose did arise, the plaintiff had not proven, after a trial on the merits, that she had in fact relied on the retirement home's representations about the method of calculating the fee.
Although Grow did involve an increased fee that the plaintiff purported not to have anticpated, the analogies between this case and that one end there. Whereas in Grow, the alleged relationship of trust was premised on the plaintiff's elderly state, no such assertion is made here. The defendant in Grow was found not to have misrepresented or omitted any material fact because it actually believed when it made the representation that its calculations of the fee were a correct projection. Here, Paul asserts that Prudential knew that its representations about the fee's calculations did not disclose all the material information available. Finally, in Grow, the Court rested its reasoning in large part on the fact that after a trial on the merits, the plaintiff had not proved that she relied on the defendant's statements; the Court here has not yet fully considered the facts regarding the issue of reliance.
The Court should only dismiss a claim if the defendant has asserted arguments requiring dismissal. The Court is not convinced by Prudential's citation to Dye, Filip, and Grow that dismissal of Paul's special relationship theory is appropriate at this stage.
iii. Misrepresentation Based on Terms of the Policy
The TAC asserts that Prudential's representations regarding premium increases appeared in two sources: (1) the renewal provision of the CHIP policy; and (2) form letters and other communications to policy-holders informing them that the premium rates were increasing solely based on age and general rising medical costs. Prudential is not challenging the latter basis for Paul's fraud claims in this motion to dismiss. Specifically, Prudential is only challenging Paul's fraud claim to the extent that it asserts that the CHIP policy misrepresented that CHIP could only be discontinued under certain limited circumstances.
The TAC asserts that:
Prudential made uniform written representations that CHIP could only be discontinued under certain limited circumstances, with the intent that policyholders would rely on these representations. As Prudential knew that closing the block would force policyholders to discontinue CHIP, such promises were false and misleading at each renewal after the block was closed, particularly in light of the representations described in paragraph 21 [of the TAC].
(TAC ¶ 65(a).)
The CHIP policy stated:
Prudential may refuse to continue this Policy as of any Policy Date anniversary, but only if Prudential is then refusing to continue all policies with the same provisions and premium rate basis in the jurisdiction in which you reside. If Prudential takes this action you will be notified not less than 31 days before the Policy Date anniversary.
(Id. at ¶ 19.)
Prudential correctly asserts that in Indiana representations about a future fact cannot support a fraud action. See Wells, 691 N.E.2d at 1250. Paul counters that the above passage from the CHIP policy does not contain any representation about a future fact, but rather constitutes a statement of the parties' rights under the policy. The Court agrees with Paul that the renewal provision is a statement about the parties' rights under the policy rather than a representation about a future fact. Specifically, it provides that Prudential may not refuse to continue the CHIP policy unless it is refusing to continue all similar policies in a given geographical area.
Prudential argues, in the alternative, that the renewal provision did not constitute a misrepresentation of any fact. Prudential cites an unpublished decision of the Court of Appeals in support of its argument. Alvarez v. Insurance Co. of N. Am., 313 Fed. Appx. 465 (3d Cir. 2008). Pursuant to Rule 5.7 of the Internal Operating Procedures, the citation of unpublished Court of Appeals decisions is discouraged and "[s]uch opinions are not regarded as precedents that bind the court because they do not circulate to the full court before filing." See, e.g., Jamison v. Klem, 544 F.3d 266, 278 n. 11 (3d Cir. 2008) ("We do not accept [unpublished opinions] as binding precedent because, unlike precedential opinions, they do not circulate to the entire court before they are filed.");In re Grand Jury Investigation, 445 F.3d 266, 276 (3d Cir. 2006) (finding that "[t]he District Court erred in relying on a NPO," and stating that such rulings "are not precedents for the district courts of this circuit.") However, Alvarez can serve as persuasive authority.
In that case, the plaintiff purchased long-term care insurance which was "guaranteed renewable." Alvarez, 313 Fed. Appx. at 466. The policy stated that
Your coverage will stay in effect as long as you continue to pay premiums. [The insurance company] cannot terminate your coverage for any other reason.
Id.
The insurance company closed the block, provoking a death spiral which made premiums increase exponentially. The plaintiff argued that the insurance company's representation that the policy was "guaranteed renewable" constituted a half-truth that misled the plaintiff. The Court of Appeals reasoned that:
[C]ontrary to [the plaintiff's] interpretation, the policy was guaranteed renewable, not guaranteed affordable. The guaranteed renewable clause meant that INA could not cancel a member's policy unilaterally for any reason, unless the member failed to pay
the premium. This guaranteed the right to renew the policy, not the financial ability to renew the policy, and did not imply that premiums would never increase, or that they would only increase by a limited, affordable amount.
Id. at 468-69.
The plaintiffs' theory of misrepresentation based on the renewal provision in Alvarez and Paul's parallel argument in this case both amount to a theories of constructive termination. In other words, Paul is asserting that he was forced to cancel his policy because it became unaffordable due to the block closure. He asserts that Prudential — by closing the block — forced him to drop his CHIP policy. The constructive termination theory rests on the presumption that the company has forced the policyholder to cancel his insurance by making the premiums unaffordable. To find that the renewal provision was a misrepresentation in the context of this theory, the Court would have to assume that in the renewal provision, Prudential somehow impliedly promised that Paul would be able to afford the CHIP premiums.
This Court is persuaded by the reasoning of the Court of Appeals in Alvarez. The provision in the CHIP policy stating that Prudential could only refuse to renew the policy under certain circumstances was not implicated by the block closure. That provision stated that Prudential could not unilaterally cancel the policy; it did not promise that the policy would be affordable. Prudential did not refuse to continue Paul's CHIP policy; Paul decided on his own that the policy was too expensive and cancelled it. The Court will grant Prudential's motion to dismiss Paul's misrepresentation claim only to the extent that it is based on the renewal provision. This determination has no logical connection and no bearing on the Plaintiffs' other fraud claims based on the form letters and other communications made outside of the policy itself. The Court is only dismissing Paul's fraud claim to the extent that it asserts that the renewal provision was a misrepresentation.
III. CONCLUSION
For the foregoing reasons, the Court will grant the motion in part and deny it in part. The Court will grant the motion to dismiss on the following claims or issues (1) Litwack's claims for violation of the NJCFA, fraudulent misrepresentation, fraudulent omission, and breach of the duty of good faith and fair dealing are dismissed without prejudice as barred by the filed rate doctrine; (2) Clark's request for injunctive relief under the UCL is dismissed without prejudice; (3) Clark's request for treble damages under the UCL is dismissed with prejudice; (4) Paul's claim that the renewal provision of the CHIP policy contained a misrepresentation is dismissed without prejudice. Clark may move for leave to file an amended complaint within 30 days of the date of this order. The remaining portions of the motion to dismiss are denied.
The TAC asserted five claims for relief: (1) fraudulent misrepresentation, on behalf of Clark, Litwack, and Paul; (2) fraudulent omissions, on behalf of Clark, Litwack, and Paul; (3) breach of the duty of good faith and fair dealing, on behalf of Clark and Litwack; (4) violation of California's UCL on behalf of Clark; and (5) violation of the NJCFA on behalf of Litwack.
The claims that remain in the case following this motion to dismiss are: (1) fraudulent misrepresentation, on behalf of Clark and Paul (with the exception of the portion of Paul's misrepresentation claim that is based on the renewal provision in the CHIP policy, which the Court is dismissing in the present opinion); (2) fraudulent omissions, on behalf of Clark and Paul; (3) breach of the duty of good faith and fair dealing on behalf of Clark; and (4) violation of California's UCL (although Clark will not be entitled to injunctive relief or treble damages on her UCL claim if she prevails, as the Court is dismissing those forms of relief in the present opinion).
The Court will enter an order implementing this opinion.
Dated: September 9, 2010.
ORDER
This matter having come before the Court on the motion of Defendant, the Prudential Life Insurance Company of America ("Prudential"), pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss the Third Amended Complaint of Plaintiffs Beverly Clark, Jesse Paul, and Marc Litwack; and the Court having reviewed the submissions and heard the argument of the parties; and for the reasons set forth in an opinion of even date,
IT IS on this 9th day of September 2010, hereby ORDERED that
(1) The claims of Marc Litwack are dismissed without prejudice.
(2) The request for injunctive relief by Beverly Clark for her California Unfair Competition Law (UCL) claim is dismissed without prejudice.
(3) The requested relief in the form of treble damages by Beverly Clark for her California Unfair Competition Law claim is dismissed with prejudice.
(4) Prudential's motion to dismiss the other aspects of Beverly Clark's UCL claim is denied.
(5) The claim of Jesse Paul that the renewal provision of the CHIP policy contained a misrepresentation is dismissed without prejudice.
(6) Prudential's motion to dismiss the other portions of Paul's claims is denied.
(7) Plaintiffs may move, within 30 days of the date of this order, for leave to amend the complaint.