MEMORANDUM OF DECISION
RALPH KIRSCHER, Bankruptcy Judge
At Butte in said District this 12th day of August, 2010.
Defendant Linda B. Jonas' ("Linda") Motion (Docket No. 5) to Dismiss Counts III, IV and V of the complaint filed by the Plaintiff/Debtor Edwin Ritter Jonas, III ("Edwin"), her former spouse, based on FED. R. CIV. P. 12(b)(1) (applicable in this adversary proceeding under F.R.B.P. 7012(b)) and the Rooker-Feldman doctrine is pending in this adversary proceeding. Plaintiff filed an objection and a hearing was held on the Motion at Missoula on June 10, 2010. The parties appeared represented by counsel. Linda was represented by Quentin Rhoades ("Rhoades") of Missoula. Edwin was represented by attorney Edwin A. Murphy ("Murphy") of Missoula. The parties agreed that the Motion involved a legal question, and no testimony or exhibits were admitted. The Court granted the parties additional time to file briefs, which have been reviewed by the Court together with the pleadings and applicable law. This matter is ready for decision. For the reasons set forth below Linda's Motion will be granted.
The Rooker-Feldman doctrine takes its name from two Supreme Court cases: Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983).
BACKGROUND FACTS PROCEDURAL HISTORY
Edwin filed a voluntary Chapter 11 petition on February 19, 2010. The Chapter 11 case was converted to Chapter 7 on June 11, 2010.
Debtor's motion to vacate the Order of conversion is pending.
Linda filed Proof of Claim No. 1 on March 19, 2010, and filed an amended Claim 1 on March 24, 2010. Linda's Claim 1 asserts a secured claim and priority claim in the amount of $1,091,391.21, based on a Notice of Filing Foreign Judgment in Cause No. DV-09-388 in Montana Twentieth Judicial District Court, Lake County, dated December 2, 2009. That Notice, a writ of execution and an order and judgment entered in Docket No. FM-04-259-89 in the Superior Court of New Jersey, Chancery Division, Family Part, Camden County, are attached to Linda's amended Claim 1.
Claim 1 specifies the priority of the claim as a domestic support obligation under 11 U.S.C. § 507(a)(1)(A) or (a)(1)(B).
Edwin initiated this adversary proceeding by filing a complaint against Linda on March 30, 2010. The complaint avers common facts, and then asserts five (5) claims for relief, including Claim III objecting to Linda's claim. The prayer of the complaint seeks to void Linda's judgment lien against property of the estate, to disallow Linda's Claim 1 in its entirety, and for damages against Linda for filing her Proof of Claim and for tortious abuse of the legal process.
Count I (Voidable Preferential Transfer based on 11 U.S.C. Sec. 547); Count II (Determination of Estate Interest in Property); Count III (Objection to Linda's Proof of Claim 1); Count IV (Damages for Filing a False Claim); and Count V (Damages for filing the New Jersey judgment in Montana).
On April 20, 2010, Linda filed an answer denying liability and requesting dismissal of the complaint with prejudice, and requesting costs and attorney fees. Linda also filed on April 20, 2010, her Motion to Dismiss and brief (Docket No. 5).
Linda moves to dismiss Counts III, IV and V of the complaint based on FED. R. CIV. P. 12(b)(1) for lack of jurisdiction. Her Motion contends that the Rooker-Feldman doctrine deprives this Court of jurisdiction to review or reverse the New Jersey judgment, as Plaintiff asks in Counts III, IV and V. She argues that Counts III, IV and V seek a determination of the same facts and issues which have already been decided in the New Jersey court, where the judgment was affirmed on appeal and is final.
Linda points out that the New Jersey courts considered Edwin's contentions of fraud against the court that he now raises in Counts III, IV, and V, but the New Jersey courts rejected them in part because of the fugitive disentitlement doctrine and Edwin's steadfast refusal to post bond, and his refusal to appear and comply with the state court orders, even to the point that a warrant was issued for his arrest.
On page 11 Linda states that the presiding judge in the New Jersey divorce case, Judge Page, has died.
Edwin filed an objection (Dkt. 8) arguing that the Rooker-Feldman doctrine applies only in a case where a plaintiff seeks to vindicate a federal right in federal court based on an argument that the state court either disregarded or misapplied. He argues that the doctrine does not apply in the instant case because there was a fraud on the New Jersey court, and that under New Jersey law and Montana law a judgment is not enforceable if it is obtained by fraud on the court. Edwin contends that Linda committed fraud on the New Jersey court by committing perjury by representing that she received no substantial property or money, and by failing to disclose that she did not hold money or property in trust as she was required by court order. Edwin argues that those matters have not been litigated in New Jersey courts because he was required to post a bond as a threshold to an accounting, and that bond requirement now is irrelevant since the case is in Chapter 11. Edwin argues that the accounting is not inextricably intertwined with the issues decided in state court, since the New Jersey trial court refused to hear the accounting, citing Fontana Empire Center, LLC v. City of Fontana, 307 F.3d 987, 992 (9th Cir. 2002). Edwin concludes that the Rooker-Feldman doctrine does not apply and this Court has subject matter jurisdiction.
Now the case is in Chapter 7.
Linda's reply briefs (Dkt. 11 18) contend that any credit to which Edwin is entitled for payments or transfers in an accounting arises under state law, not federal law, and that the New Jersey court imposed its judgment against Edwin based on the fugitive disentitlement doctrine as sanctions for his bald contempt for the New Jersey court system by refusing to appear. She repeats that Rooker-Feldman applies and this Court lacks jurisdiction to consider Counts III, IV or V and should dismiss those Counts.
The Court granted Edwin additional time to file a supplemental brief (Dkt. 17). In Dkt. 17 Edwin repeats that Linda obtained the 2006 judgment in the New Jersey court by a fraud on the court, and by representations under penalty of perjury that she had not been paid and placed money in a trust account. He argues that the fugitive disentitlement doctrine is not a license to commit fraud on the court, and that Linda now admits that he has not been given credit while in the New Jersey divorce case she told the court no payments had been made. Lastly Edwin suggests that the New Jersey courts have not rendered a final judgment on the amount owed, so Rooker-Feldman does not apply and the motion to dismiss should be denied.
DISCUSSION
Linda's Motion to Dismiss Counts III, IV and V is based on the Rooker-Feldman doctrine. The Ninth Circuit discussed the Rooker-Feldman doctrine at length recently in Carmona v. Carmona, 603 F.3d 1041, 1050 (9th Cir. 2010):
The
Rooker-Feldman doctrine takes its name from two Supreme Court cases:
Rooker v. Fidelity Trust Co., 263 U.S. 413,
44 S.Ct. 149,
68 L.Ed. 362 (1923) and
District of Columbia Court of Appeals v. Feldman, 460 U.S. 462,
103 S.Ct. 1303,
75 L.Ed.2d 206 (1983). It stands for the relatively straightforward principle that federal district courts do not have jurisdiction to hear de facto appeals from state court judgments. [
Noel v. Hall, 341 F.3d 1148, 1155 (9
th Cir. 2003)]. The jurisdiction prohibition arises from a negative inference drawn from
28 U.S.C. § 1257 which grants jurisdiction to review state court decisions in the United States Supreme Court.
Kougasian v. TMSI, Inc., 359 F.3d 1136, 1139 (9
th Cir. 2004) (citation omitted). Because it grants jurisdiction to the Supreme Court, section 1257 impliedly prohibits lower federal courts from reviewing state court decisions.
Id.
Stated simply, the
Rooker-Feldman doctrine bars suits "brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.
Exxon Mobil Corp. v. Saudi Basic Indust. Corp., 544 U.S. 280, 284,
125 S.Ct. 1516,
161 L.Ed.2d 454 (2005). In practice, the
Rooker-Feldman doctrine is a fairly narrow preclusion doctrine, separate and distinct from res judicata and collateral estoppel.
See Noel, 341 F.3d at 1162-64.
We have previously explained how federal courts should distinguish a forbidden de facto appeal of a state court decision that is barred by
Rooker-Feldman
from a suit that is barred by other preclusion principles. A suit brought in federal district court is a "de facto appeal" forbidden by
Rooker-Feldman when "a federal plaintiff asserts as a legal wrong an allegedly erroneous decision by a state court, and seeks relief from a state court judgment based on that decision."
Id. at 1164. In contrast, if a plaintiff "asserts as a legal wrong an allegedly illegal act or omission by an adverse party,
Rooker-Feldman does not bar jurisdiction."
Id.
In 2006 the Supreme Court repeated: " Rooker-Feldman is not simply preclusion by another name. The doctrine applies only in `limited circumstances,' Exxon Mobil, supra, at 291, 125 S.Ct. 1516, where a party in effect seeks to take an appeal of an unfavorable state-court decision to a lower federal court." Lance v. Dennis, 546 U.S. 459, 466, 126 S.Ct. 1198, 1202, 163 L.Ed.2d 1059 (2006).
Earlier the Ninth Circuit explained the Rooker-Feldman doctrine as follows:
In its routine application, the
Rooker-Feldman doctrine is exceedingly easy. A party disappointed by a decision of a state court may seek reversal of that decision by appealing to a higher state court. A party disappointed by a decision of the highest state court in which a decision may be had may seek reversal of that decision by appealing to the United States Supreme Court. In neither case may the disappointed party appeal to a federal district court, even if a federal question is present or if there is a diversity of citizenship between the parties.
Rooker-Feldman becomes difficult — and, in practical reality, only comes into play as a contested issue — when a disappointed party seeks to take not a formal direct appeal, but rather its de facto equivalent, to a federal district court.
Noel v. Hall, 341 F.3d at 1155.
The Ninth Circuit explained that the Rooker-Feldman doctrine is a statute-based doctrine based on negative inferences of relevant statutes, the modern day successors to which are 28 U.S.C. §§ 1331, 1332, and 28 U.S.C. 1257. 341 F.3d at 1154-55. However:
Under the modern statutory structure, the principle that there should be no appellate review of state court judgments by federal trial courts has two particularly notable statutory exceptions: First, a federal district court has original jurisdiction to entertain petitions for habeas corpus brought by state prisoners who
claim that the state court has made an error of federal law.
28 U.S.C. § 2254. Second, a federal bankruptcy court has original jurisdiction under which it is "empowered to avoid state judgments,
see, e.g., 11 U.S.C. §§ 544,
547,
548,
549; to modify them,
see, e.g., 11 U.S.C. §§ 1129,
1325; and to discharge them,
see, e.g., 11 U.S.C. §§ 727,
1141,
1328." [
In re Gruntz, 202 F.3d 1074, 1079 (9
th Cir. 2000) (en banc)].
Noel v. Hall, 341 F.3d at 1155. Neither of those two exceptions applies to Linda's Motion to Dismiss Counts III, IV and V, since they are based on Linda's filing a false and overstated claim and judgment in Montana without giving him credit and offset for amounts paid.
The Debtor argues that Rooker-Feldman does not apply and this Court has jurisdiction because of alleged fraud on the court committed by Linda in the New Jersey divorce court. Debtor argues that, by asserting "as a legal wrong an allegedly illegal act or omission by an adverse party, Rooker-Feldman does not bar jurisdiction." See, Noel v. Hall, 341 F.3d at 1164. Id. At first glance the allegation of Linda's fraud on the court might appear to constitute an "allegedly illegal act or omission" in which case Rooker-Feldman would not bar jurisdiction. Id. Under closer review, however, any legal wrong is "an allegedly erroneous decision by a state court" in which case Rooker-Feldman bars subject matter jurisdiction in federal district court under controlling Ninth Circuit law. Carmona, 603 F.3d at 1050; Noel v. Hall, 341 F.3d at 1164.
It is clear to this Court that the only reason, if any, for any error in accounting of payments or credit of transfers of money from Edwin to Linda in the New Jersey divorce case is because Edwin refused to appear in the New Jersey state court and litigate his claims for an accounting, or to prove his claim of fraud on the court by Linda. Edwin refused to appear, post bond, or to comply with other orders of the New Jersey court, which proceeded in his absence to hear and decide the issues before it and, not surprisingly given Edwin's failure to appear and prove his contentions in state court, entered judgment against him. The judgment was affirmed on appeal and, contrary to Edwin's contention, the judgment is final. Especially in light of Edwin's contempt and defiance in the New Jersey court, this Court finds that the Rooker-Feldman doctrine bars Edwin's Counts III, IV and V brought in this case by the loser in state court. Carmona, 603 F.3d at 1050; Noel v. Hall, 341 F.3d at 1164.
To allow Edwin to proceed in this Court to litigate Counts III, IV and V would have the effect of condoning, countenacing, and ultimately rewarding Edwin for his defiance and contempt in the New Jersey state court system. This the Court will not do, since it would encourage such tactics and conduct by other parties.
Furthermore, to the extent Rooker-Feldman would not bar jurisdiction, an additional exception to federal jurisdiction known as the "domestic relations" exception exists, which must be taken into account since the underlying dispute between these parties arises from their divorce. The domestic relations exception covers "only a narrow range of domestic relations issues." Marshall v. Marshall, 547 U.S. 293, 298, 307-08, 126 S.Ct. 1735, 1741, 1746, 164 L.Ed.2d 480 (2006), citing Ankenbrandt v. Richards, 504 U.S. 689, 112 S.Ct. 2206, 119 L.Ed.2d 468 (1992). The Supreme Court clarified that "only `divorce, alimony, and child custody decrees' remain outside federal jurisdictional bounds. [ Ankenbrandt] at 701, 112 S.Ct. 2206 Barber v. Barber, 21 How. 582, 16 L.Ed. 226 (1859)]. While recognizing the `special proficiency developed by state tribunals . . . in handling issues that arise in the granting of `divorce, alimony, and child custody] decrees,' id., at 704, 112 S.Ct. 2206, we viewed federal courts as equally equipped to deal with complaints alleging the commission of torts, ibid." Marshall, 547 U.S. at 308, 126 S.Ct. at 1746.
The limited scope of the domestic relations exception might not apply under Marshall and Ankenbrandt, since those cases specifically viewed federal courts as equally equipped to deal with complaints alleging the commission of torts. Marshall, 547 U.S. at 308, 126 S.Ct. at 1746. On the other hand, the domestic relations exception recognizes the "special proficiency developed by state tribunals . . . in handling issues that arise in the granting of `divorce, alimony, and child custody] decrees.'" Marshall, 547 U.S. at 308, 126 S.Ct. at 1746; Ankenbrandt, 504 U.S. at 704. Since Linda's claim unquestionably arose in the granting of the parties' divorce decree, the New Jersey divorce court has the special proficiency, and specific experience in dealing with the parties' divorce, which would weigh in favor of applying the domestic relations exception to federal court jurisdiction.
Further, although federal courts are equally equipped to deal with complaints alleging the commission of torts, Marshall, 547 U.S. at 308, 126 S.Ct. at 1746; Ankenbrandt, 504 U.S. at 704, the tort alleged by Edwin is not just a tort against himself, but rather he alleges fraud upon the New Jersey divorce court by Linda. It cannot be reasonably argued that this Court is equally equipped to deal with an alleged fraud on the New Jersey divorce court, as that court is itself. The New Jersey court heard the divorce proceedings, reviewed the record, observed the testimony, and rendered a decision. Finally, the New Jersey court has a special interest in managing and protecting the integrity of proceedings before it, and in particular has a special interest in considering whether fraud upon the court was committed by parties appearing before it.
Since the presiding judge in the New Jersey divorce appears to have died, that possibility of bias against Edwin no longer exists.
Returning to the Rooker-Feldman doctrine, it bars federal court jurisdiction over claims "inextricably intertwined" with a state court judgment, and a claim is inextricably intertwined "if the federal claim succeeds only to the extent that the state court wrongly decided the issues before it." Fontana, 307 F.3d at 992 (citing cases). If the New Jersey courts wrongly decided the issues of fraud on the court and Edwin's claim for an accounting, those claims were inextricably intertwined with the divorce, and any error must be assigned in large part to Edwin's failure to appear and comply with state court orders.
For these reasons this Court holds that it lacks jurisdiction under both the Rooker-Feldman doctrine and the "domestic relations exception" to federal court diversity jurisdiction.
IT IS ORDERED a separate Order shall be entered in conformity with the above granting Linda's Motion to Dismiss Counts III, IV and V of the complaint.
egation to convert it into one that could even arguably be said to be fraudulent: "The Defendants
concealed their intention to improperly and secretly conduct [] inspections. . . ."
The third allegation states "The Defendants secretly communicated with potential buyers of [Stone Creek] . . . to discourage their purchase. . . ." Again, this allegation does not identify a fact that was falsely represented to or concealed from someone; it simply asserts that the Defendants engaged in certain conduct towards others. Stretching this allegation most generously, one might infer that the representations made to potential buyers were false, but there are no allegations that specify the false representations, reasonably reliance upon them and a resulting loss. Viewed from the alternative perspective, the word "secretly" might imply that the Defendants "concealed," something from the Plaintiff. But again, the information that was concealed is not identified, nor are there allegations that the reasonably Plaintiff relied upon the absence of such information to its detriment. Simply put this allegation is far too vague and incomplete to adequately support a claim for fraud or fraudulent concealment.
Earlier in that paragraph, the Plaintiff alleges that "Upon information and belief, Defendants communicated with the prospective buyers of Stone Creek regarding the alleged necessity for extensive repairs, the alleged presence of high levels of asbestos, [etc.]" The Plaintiff does not, however, plead any facts that indicate the source of this "information and belief," other than the averment discussed in the body of this Opinion. When a party seeks to plead a fraud claim based upon allegations made "upon information and belief," the party must "set [] forth the factual basis for the plaintiff's belief." Scheidt v. Klein, 956 F.2d 963, 967 (10th Cir. 1992).
To the contrary, other allegations in the Complaint, tie this allegation to action by a prospective buyer, not the Plaintiff. Paragraph 37 states that "At least one potential buyer of Stone Creek advised a broker that he knew that Defendants were going to attempt to foreclose on the property and that as a result he would wait to attempt to purchase the property."
The fourth fraud allegation states that the Defendants "failed to disclose and concealed [their] involvement in the" asbestos inspection. This allegation is defective for many of the reasons discussed above. The Plaintiff does not plead facts that would show why the Defendants were required to or should have disclosed the fact that they participated in the asbestos inspection. In addition, there is no allegation that the absence of such information was reasonably relied upon by the Plaintiff to its detriment. Moreover, the Amended Complaint appears to indicate that the Plaintiff knew of the Defendants' participation, as the attendance of the Defendants' attorney at the inspection was "reflected in the inspection notice." No claim of fraudulent concealment can lie where the Plaintiff was actually aware of the fact purportedly concealed.
The fifth fraud allegation states that the Defendants misrepresented "that it would `work with' [the Plaintiff]" to find a buyer, despite the Defendants having a ground to pursue foreclosure. By definition, this statement is a representation of a promise to perform an act in the future, not a statement of an existing fact. Thus, the Plaintiff must allege facts to show that the Defendants did not have a present intent to "work with" them to find a buyer at the time the statement was made. The Amended Complaint contains no allegations that the Defendants lacked such an intent when the statement was made. Accordingly, this allegation is insufficient to support a claim for fraud.
The Court has some doubt that an inherently ambiguous phrase such as a promise to "work with" the Plaintiff can ever constitute a representation of fact sufficient to give rise to a fraud claim.
The Court notes that the Plaintiff does not allege when the statement was made; indeed, the "work with" statement is not discussed anywhere in the Amended Complaint other than in the fraud claim.
Finally, the Amended Complaint alleges that the Defendants "misrepresented . . . that Defendants would not pursue a foreclosure action and would release insurance money held in escrow to [the Plaintiff] if [the Plaintiff] paid for certain repairs." This allegation does identify a specific statement of fact — technically, a statement of a present intent to perform future acts ("intent not pursue a foreclosure action," "intent to release insurance money") — and to some extent, identifies who said it ("a conversation between Nick Forrette and Rosann Juracek-Harris") and when it was said (inferentially, the statement had to be made prior to the date the foreclosure action was commenced on November 30, 2006). Arguably, then, the statement is pled with sufficient particularity.
Ms. Harris is identified in the Amended Complaint as an employee of EFA. The Amended Complaint does not identify Mr. Forrette.
However, the alleged falsity turns on the Defendants intent at the time the statements were made. Thus, to be false, there must be an allegation that when the statements were made, the Defendants did not intend to do these things. There is no such allegation in the Amended Complaint.
As noted, the Amended Complaint temporally locates the statement only as being made prior to the commencement of foreclosure proceedings, and prior to the performance of the unspecified "certain repairs." Without the ability to determine specifically when the statement was made, it is impossible to find support in the Amended Complaint for the assertion that the Defendants did not have an intent to perform their promise at the time it was made. Nothing in the Amended Complaint juxtaposes, temporally or otherwise, a statement by the Defendants regarding the Plaintiff making repairs to the property with facts that show that the Defendants never intended to refund the Plaintiff's escrow funds or forego foreclosure.
Thus, the Plaintiff has failed to adequately allege a claim for misrepresentation premised upon this statement.
Because none of the specific allegations in the fraud claim adequately state a claim for relief, the first cause of action for fraud is dismissed.
C. Breach of fiduciary duty
The Defendants move to dismiss this claim on the grounds that the Plaintiff does not plead facts that would demonstrate the existence of a fiduciary duty assumed by the Defendants.
A fiduciary relationship arises under Colorado law in situations in which one party "has a high degree of control over the property or subject matter of another, or when the benefitting party places a high level of trust and confidence in the fiduciary to look out for the beneficiary's best interest." MDM Group Assocs., Inc. v. CX Reinsurance Co., 165 P.3d 882, 889 (Colo. App. 2007). A confidential relationship may give rise to a fiduciary duty if one party justifiably reposes a special trust and confidence in another such that the reposing party's ordinary vigilance and care is relaxed. Turkey Creek, LLC v. Rosania, 953 P.2d 1306, 1312 (Colo. App. 1998). In determining whether a fiduciary duty exists based on a confidential relationship, the party asserting the existence of such a duty must show: (i) either the reposing of trust and confidence in the other party was justified, or the party in whom the confidence was reposed either invited, accepted, or acquiesced in such trust; (ii) the alleged trustee assumed a primary duty to represent the other party's interest in the transaction; (iii) the nature and scope of the duty that arose from that confidential relationship extends to the subject matter of the suit, and (iv) the duty that was violated, causing damages to the party asserting the existence of the duty. Equitex, Inc. v. Ungar, 60 P.3d 746, 752 (Colo. App. 2002).
The Amended Complaint contends that "the Defendants were acting as a fiduciary of the Plaintiff with respect to the management of the loan and the administration of the repair and replacement escrow accounts." It is not clear in what respect the Plaintiff claims that the Defendants' "management of the loan" gave rise to any fiduciary relationship, but with regard to the alleged relationship arising out of "the administration of the . . . escrow accounts," the Plaintiff explains that the Defendants had "qualified discretion" to make "payment of vendors and liens on the Stone Creek Apartments property" with the escrowed funds, and that the Defendants "further had discretion as to a determination of whether repairs, maintenance, or replacements were needed on the property." In addition, the Plaintiffs argue that a second fiduciary duty arose because the Defendants "required [the Plaintiff] to provide information . . . regarding [the Plaintiff's] efforts to sell the property." As a result of having this information, "the Defendants . . . provided advice to [the Plaintiff] with respect to the management of the properties and its strategy for selling the properties."
Normally, one would assume that one party's placing of funds in escrow with another party for management and disbursement would be precisely the kind of situation that would give rise to fiduciary obligations. The Defendants here contend that the terms of the written agreements between the parties warrant a different conclusion. The "Replacement Reserve and Security Agreement," the contract that concerns the escrow account, is specifically referred to the Plaintiff in the Amended Complaint and the parties have not disputed the authenticity of the copy attached to the Defendants' motion. That document required that, beginning in June 1999, the Plaintiff would make monthly deposits of a certain amount of money into an interest-bearing account. The Defendants were given "the sole right to make withdrawals from such account." The contract provides that the Plaintiff "assigns to [the Defendants] the Replacement Reserve as additional security for all of [the Plaintiff's] obligations under the Loan Documents," but provides that the Defendants "shall make disbursements from the Replacement Reserve in accordance with the terms of this Agreement." Among other things, the agreement requires the Defendants to "reimburse [the Plaintiff] for the costs of" certain repair items listed in the contract upon satisfaction of stated requirements.
Assuming the Replacement Reserve and Security Agreement created some fiduciary-type duty in the Defendants with regard to the escrowed funds, the Court finds merit in the Defendants' argument that any breach alleged in the Amended Complaint is one of the contract's terms itself, not any collateral fiduciary duty. The crux of the Plaintiff's contention on this point is that the Defendant refused to use the escrowed funds to pay contractors who had performed repairs on the property, even though the contract called for the Defendants to do so. The Defendants' failure, then, would constitute a breach of the contract's express or implied terms, giving rise to a remedy in contract only. See Micale v. Bank One, N.A., 382 F.Supp.2d 1207, 1221-22 (D. Colo. 2005) (fiduciary duty must arise from obligations "not contemplated under the terms of the contract"). Under these circumstances, the "economic loss rule" bars the Plaintiff from recovering in tort — such as a claim for breach of fiduciary duty — for injuries sustained as a direct result of the Defendants' alleged breach of contractual terms. To the extent the breach of fiduciary duty claim is premised upon the Defendants' failure to make proper reimbursement payments out of the repair escrow account, the claim is dismissed in favor of the Plaintiff's breach of contract claim.
The Plaintiff essentially concedes as much. In responding to the Defendants' invocation of the economic loss rule with regard to the breach of fiduciary duty claim, the Plaintiff refers to the fiduciary duty created by the sharing of sales information and strategy as existing outside the terms of the parties' contracts, not a fiduciary duty arising out of the Replacement Reserve Agreement.
Separately, the Plaintiff asserts that a second fiduciary duty arose between the parties because the Defendant demanded (and the Plaintiff supplied) "information . . . regarding [the Plaintiff's] efforts to sell the property," and the Defendants thereafter "had discussions . . . and provided advice . . . with respect to the management of the properties and [the Plaintiff's] strategy for selling the properties." As previously mentioned, to plead a claim based on this alleged fiduciary duty, the Plaintiff must plead, among other things, facts that would show that the Defendants "invited" the Plaintiff to place trust and confidence in the Defendants with regard to this information, and that the Defendants "assumed a primary duty" to represent the Plaintiffs' interests with regard to investigating potential buyers and devising a sales strategy. The facts pled in the Amended Complaint, even when taken in the light most favorable to the Plaintiff, only hint at the former and give no indication whatsoever with regard to the latter. The Amended Complaint alleges only that the Defendants "required [the Plaintiff] to provide information" regarding efforts to sell the property, even though such sharing of information was not a contractual requirement. This largely conclusory assertion might arguably permit an inference that the Defendants "invited" the Plaintiffs to repose confidential information in the Defendants about prospective buyers of Stone Creek. But that bare assertion — and nothing else in the Amended Complaint elaborates on the issue — does not permit the Court to infer that, by demanding the information, the Defendants somehow manifested a willingness to thereafter act in the Plaintiff's interests in discussing the potential sale of Stone Creek. Similarly, the mere fact that the Defendants gave advice to the Plaintiff or discussed strategies in how to best market and sell Stone Creek does not give rise to an inference that the Defendants intended to assume a fiduciary duty to act for the Plaintiff in aiding in the sale of the property. Because the Amended Complaint does not plead facts from which the Defendants' intent to assume a fiduciary duty to the Plaintiff concerning attempts to sell Stone Creek can be plausibly inferred, the fiduciary duty claims are dismissed.
D. Intentional Interference claims
The Plaintiff asserts two separate but similar tort claims: intentional interference with contractual relations and intentional interference with prospective economic advantage. Except in one respect, the elements of the claims are the same; the Plaintiff must allege: (i) it had either a valid existing contract with a third party or that it expected to enter into a contract with a third party; (ii) the Defendants induced or otherwise caused the third party to breach the contract or not enter into the contractual relation; and (iii) the Defendants did so intentionally and via improper means. Harris Group, Inc. v. Robinson 209 P.3d 1188, 1195-96 (Colo. App. 2009).
Here, the Defendants contend that the Plaintiff has not alleged the existence of a valid contract or expected contract, has not alleged actions constituting improper interference, and that any such claims are barred by the statute of limitations. Turning to the first point, the Plaintiff responds that the Amended Complaint alleges both the existence of a valid contract with a prospective buyer for the purchase of Stone Creek and expected contracts with other prospective buyers. Paragraph 12 of the Amended Complaint states that the Plaintiff posted Stone Creek for sale on May 25, 2005 and that "there were numerous offers to purchase Stone Creek starting from $35,600,000." Notably, the language in the Amended Complaint is "offers to purchase," not "agreements," and nowhere does the Plaintiff allege that it actually entered into an actual contract for the purchase of Stone Creek with any buyer. This failure is sufficient to justify dismissal of any claim for intentional interference with contract.
The Amended Complaint makes a passing reference to the Defendant requiring the Plaintiff to provide "purchase agreements," but it does not allege that these were contracts duly executed by a buyer, as opposed to being draft purchase agreements being exchanged between the Plaintiff and the prospective buyer for review and comment
As to claims of interference with prospective business advantage, Colorado adopts the tort as reflected in theRestatement (Second), Torts, § 766B. Harris, id. at 1196, citing Dolton v. Capitol Federal Sav. Loan Assn., 642 P.2d 21, 23 (Colo. App. 1981). Comment c to that section explains that the protected `prospective contractual relation' is "not used in this Section in a strict, technical sense." Purposeful, improper interference with discussions that might lead to a formal, binding contract is actionable, as is such interference with prospective quasi-contractual agreements or even "the voluntary conferring of commercial benefits in recognition of a moral obligation." Id. Here, although the Plaintiff has not alleged that it actually entered into a contract with a prospective buyer, it adequately contends that it received purchase offers from prospective buyers that, presumably with further negotiation, would have led to an actual sale. This is sufficient to allege a prospective business advantage so as to support this claim.
As to the second point — whether the Defendants engaged in improper means to squelch the Plaintiff's prospective business — such claims are assessed in light of a multi-factor analysis that inquires into, among other things, (i) the nature of the interfering conduct; (ii) the actor's motive; (iii) the relations between the parties; and (iv) the proximity of the conduct to the alleged interference. Harris, 209 P.3d at 1196. The Court finds that the Plaintiff has adequately alleged that the Defendants engaged in intentional, wrongful conduct designed to stymie a potential purchase of Stone Creek. The Plaintiff contends that a Fannie Mae representative threatened to act to prevent the Plaintiff from ever making a profit on the property, and that thereafter, Fannie Mae improperly declared the loan agreement in default and subject to foreclosure, and otherwise required the Plaintiff to incur expensive repairs that made selling the property for the prices offered by the prospective buyers impractical. At this early stage of the litigation, the Court finds these allegations sufficient to state a claim for tortious interference with prospective business advantage.
However, the Defendants raise a cogent argument that such claims are likely barred by the statute of limitations. The parties agree that, in Colorado, a claim for tortious interference with prospective business advantage is subject to a two-year statute of limitations. C.R.S. § 13-80-102(1)(a). The Plaintiff commenced this action in state court on March 11, 2009, and thus, the tortious interference with prospective advantage claim must have arisen no earlier than March 11, 2007. The Amended Complaint appears to locate the initial attempts to sell Stone Creek — attempts frustrated by the Defendants' actions — in 2005, making those claims long stale.
The Plaintiff's response to this argument is somewhat unclear. The Plaintiff states that its claim "arises from Defendants' on-going improper conduct," appear to argue for some sort of "continuing violation" tolling of the statute of limitations, but cites no authority for such a proposition. Colorado limits the application of the "continuing violation" doctrine to employment discrimination cases. Polk v. Hergert Land Cattle Co., 5 P.3d 402, 405 (Colo. App. 2000). Alternatively, the Plaintiff argues that the claim did not accrue until it actually sold Stone Creek in May 2008, as it was only then that the Plaintiff suffered a reduced sale price compared to prior offers. For this proposition, the Plaintiff cites to Colburnt v. Kopit, 59 P.3d 295, 296 (Colo. App. 2002). Colburnt stands for the unremarkable proposition that a claim accrues when the claimant has knowledge of facts that would put a reasonable person on notice that he had suffered an injury that was caused by the wrongful conduct of another. Id.
Here, the Plaintiff's theory is that the Defendants falsely declared defaults, sought to foreclose on the property, and otherwise engaged in actions so as to discourage prospective purchasers from buying. The Amended Complaint makes clear that the Plaintiff put Stone Creek up for sale in May 2005; received an offer at an undisclosed time thereafter; was threatened by Fannie Mae on November 7, 2006, that it "was not going to allow [the Plaintiff] to make any profit" on the sale; and that Fannie Mae commenced foreclosure proceedings on November 30, 2006. To the extent these actions interfered with any prospective buyers, the actions were completed and known to the Plaintiff long before March 11, 2007, and thus, claims premised on these actions are untimely.
The Amended Complaint identifies only a handful of actions occurring after March 11, 2007. It notes that the foreclosure proceeding was withdrawn by Fannie Mae on March 27, 2007, but this event is inconsequential to an interference with business advantage claim — if anything, the withdrawal of the foreclosure proceedings made it more likely that prospective buyers would make offers to the Plaintiff to purchase the property. The Amended Complaint also notes the events of March 22-23, 2007, when the City of Denver conducted an asbestos investigation of the property and required the Plaintiff to undertake lengthy and expensive asbestos abatement. Although a claim that prospective buyers were discouraged by this event might be timely, the Court finds that a claim premised upon the asbestos inspection fails to state a claim because the conduct involved cannot constitute "improper" interference. It is undisputed that, regardless of whoever called the City of Denver to complain about the asbestos issue, the City found that the asbestos contamination required immediate abatement. As Harris explains, the factors bearing on the question of whether interference with a prospective business advantage is "improper" include examination of "the social interests" implicated by the challenged action. Here, even assuming that the Defendant reported the asbestos condition out of ill motive towards the Plaintiff, the Court finds that the public interest in prompt disclosure of a dangerous building condition outweighs any private interest that the Plaintiff might have in requiring the Defendant to keep its knowledge of that information concealed. Thus, although timely, no cognizable claim premised on the asbestos incident can be asserted here.
Taken to its logical end, the Plaintiff's premise is ill-supported. One assumes that, if the Defendant was aware of a dangerous asbestos condition in the property, the Plaintiff was as well. If the Plaintiff was aware of this condition, it undoubtedly had a legal obligation to disclose the condition to any putative buyer, and either arrange to abate the condition prior to closing the sale or discounting the price to reflect the buyer's abatement responsibilities. The fact that the Defendant may have forced the Plaintiff's hand by reporting the condition to the City of Denver does not alter the fact that the condition would have to have been disclosed to any potential buyer in any event.
That leaves the Plaintiff with the contention in Paragraph 30 that, on March 23, 2007, the Defendants declared a series of additional defaults on the property, relating to the failure of the Plaintiff to notify the Defendants of a change in management, certain unperformed (non-asbestos) repairs, and the existence of mechanics' liens. The Plaintiff alleges that these defaults were unfounded, and there are allegations in the Amended Complaint that suggest that these actions were motivated by an improper purpose of discouraging prospective buyers from making offers on the property. Although the Amended Complaint does not specifically recite the existence of putative buyers occurring on or after May 23, 2007, the Court will assume from the Plaintiff's general allegations that such buyers existed. Thus, the tortious interference with prospective business advantage will be limited to situations in which buyers were allegedly discouraged from extending offers as a result of the Defendants improper noticing of non-asbestos-related defaults on March 23, 2007. In all other respects, the tortious interference claims are dismissed.
E. Civil conspiracy
The Plaintiff asserts a "claim" for common-law "civil conspiracy." Although courts often refer to civil conspiracy as a "claim," it is not truly a substantive cause of action. Conspiracy is a "derivative cause of action that is not actionable per se," and is essentially a means of holding one defendant liable for the substantive wrongs committed by another. See Double Oak Const., LLC v. Cornerstone Development Intl. LLC, 97 P.3d 140, 146 (Colo. App. 2003). For example, if the Plaintiff could not show that EFA itself engaged in any actionable conduct of its own accord, but could show that EFA conspired with Fannie Mae to accomplish a certain goal through Fannie Mae's actions alone, the doctrine of civil conspiracy might allow EFA to be held liable for damages caused by Fannie Mae carrying out the object of the conspiracy. See id.
In this sense, then, the civil conspiracy "claim" is superfluous. The Plaintiff has alleged that both Defendants jointly engaged in all of the substantive unlawful conduct herein (or, alternatively, has argued that EFA engaged in certain acts as Fannie Mae's agent, nevertheless binding both entities to liability.) A conspiracy allegation will become necessary only if the Court determines that the Plaintiff lacks evidence that a Defendant personally participated in a particular unlawful act; upon proof that the Defendant nevertheless conspired to bring about that act, the Court could still hold that Defendant liable for damages resulting therefrom.
Thus, the Court will not adjudicate the Defendants' challenges to the civil conspiracy claim at this time. As noted above, the claim is entirely derivative, and thus, it depends upon the Plaintiff both proving wrongdoing by one Defendant and the lack of actual participation in that wrongdoing by the other. Should the Court conclude that those conditions are met, then, and only then, will it examine whether the Plaintiff can prove the existence of a civil conspiracy sufficient to hold the non-acting Defendant liable for the unlawful act.
F. Abuse of process
To state a claim for abuse of process under Colorado law, the Plaintiff must show: (i) that the Defendants invoked a judicial process; (ii) that they did so with an ulterior purpose; (iii) that their use of the process was in a manner that was inconsistent with its proper use; and (iv) that the Plaintiff suffered damage as a result. Moore v. Western Forge Corp., 192 P.3d 427, 438 (Colo. App. 2007). Abuse of process lies where a party invokes legal proceedings not for their intended purpose, but in an effort to obtain collateral results that would not be available by the normal operation of such proceedings. James H. Moore Assocs. Realty, Inc. v. Arrowhead at Vail, 892 P.2d 367, 373 (Colo. App. 1994), citing Restatement, 2d Torts, § 682, comment b (no claim lies "when the process is used for the purpose for which it is intended, [even though] there is an incidental motive of spite or an ulterior purpose"). For example, a party engages in abuse of process when he files liens against his adversary, not because the filer claims an interest in the property, but to compel the adversary to concede a child custody proceeding. James H. Moore, 892 P.2d at 373, citing Scozari v. Barone, 546 So.2d 750 (Fla. App. 1989).
Here, the Plaintiff alleges that the Defendants commenced a foreclosure proceeding on Stone Creek, premised on sham "defaults" of the loan agreement. The Amended Complaint states that "the principal reason for Defendants' actions was other than to foreclose on the Stone Creek Apartments, but rather, to weaken the financial viability of the Plaintiff and its owner . . ., to ensure that Plaintiff was required to pay the entire debt[,] to obtain title and possession of all three properties, and ultimately to obtain a personal judgment against [the Plaintiff's principal]." Other than the first stated purpose — the goal of "weaken[ing] the financial viability of the Plaintiff" — all of the purposes stated are bona fide reasons for a lender invoking a foreclosure remedy. The purpose of foreclosure is to ensure that the lender receives full payment of the debt or, in the alternative, to take possession of the collateral and is the first step in obtaining an excess judgment against the borrower personally. Although the Amended Complaint also alleges an ulterior motive — the Defendants' desire to financially weaken the Plaintiff — the presence of an ulterior motive does not give rise to a cause of action where the process is otherwise invoked for its normal purpose. James H. Moore, 892 P.2d at 373. The Plaintiff admits that the Defendants invoked the mechanism of foreclosure in an attempt to take over the property. Because this is the intended function of the foreclosure process, no cognizable abuse of process claim is stated.
G. Breach of contract/covenant of good faith and fair dealing
The Defendants concede that, in light of the Amended Complaint, the Plaintiff has adequately stated a contractual claim against Fannie Mae. The Defendants contend that no such claim is stated against EFA and that any contractual claim against EFA should be dismissed. The Court finds that the Plaintiff has stated a variety of theories that might give rise to EFA's liability, in part or whole, for Fannie Mae's breaches of the contract, including direct liability ( i.e. EFA, as servicer of the loan, had the ability to direct unnecessary repairs and deem the loan to be in breach), liability as Fannie Mae's agent, and liability for conspiracy. Whether the Plaintiff can ultimately establish both Fannie Mae's breach of the contract and EFA's personal liability therefor is an issue that must await substantive factual development.
H. Colorado Consumer Protection Act
To state a claim under the Colorado Consumer Protection Act, the Plaintiff must allege: (i) that the Defendant engaged in an unfair or deceptive trade practice; (ii) the practice occurred in the course of the Defendant's business; (iii) the practice significantly impacts the public as actual or potential consumers of the Defendant's goods or services; (iv) the Plaintiff suffered injury to a legally-protected interest; and (v) the challenged practice caused the Plaintiff's injury. Park Rise Homeowners Assn. v. Resource Constr. Co., 155 P.3d 427, 434-35 (Colo. App. 2006). Although the Defendants allege that the Plaintiff has failed to state several of these elements, the Court limits is analysis to the question of whether the Plaintiff adequately alleged that any deceptive practices engaged in by the Defendants "significantly impact [] the public."
A wrong that is "private in nature, and does not affect the public," does not give rise to liability under the Act. Rhino Linings USA, Inc. v. Rocky Mountain Rhino Linings, Inc., 62 P.3d 142, 149 (Colo. 2003). Thus, where the challenged conduct amounts to nothing more than a breach of a private contract between the parties, it is difficult to conceive of a public interest in the matter. Id. at 150. Here, the "deceptive practices" that the Plaintiff alleges relate entirely to the way in which the Defendant has handled the particular loan to the Plaintiff; put differently, the Plaintiff does not allege that, for example, the Defendants made false representations concerning the benefits or features of their products in advertising that was disseminated to a large number of consumers. Id. (contrasting a case in which the defendant's performance of a contract was allegedly deceptive but its advertising contained no deception with a case "where we concluded that the defendants' widespread advertisements had a significant public impact because the public was told important facts by the defendant which were untrue"). In short, the Plaintiff alleges only that the Defendants have engaged in deceptive practices towards the Plaintiff, not that the Defendants' deception has been perpetrated on the public at large.
The Plaintiff argues that because Fannie Mae has the ability to engage in the same type of deceptive practices with hundreds of thousands of properties it is the lender on, the conduct here has a public impact. This argument is not only speculative and unsupported by allegations in the Amended Complaint, it is also legally insufficient. The fact that the alleged deceptive practice is one which could be replicated with other consumers is insufficient to allege that the practice did indeed "impact the public." The Colorado Supreme Court reached a similar conclusion in Rhino Linings. There, the plaintiff had promised the defendant an exclusive sales territory, then entered into a contract with another party that effectively allowed that party to sell in the same territory as the defendant. In finding that this breach of the contract did not give rise to a Consumer Protection Act claim because the public was not impacted by the conduct, the Colorado Supreme Court observed that "Three affected dealers out of approximately 550 worldwide does not significantly affect the public." Id. Obviously, the plaintiff in Rhino could just as easily have breached that same contractual exclusivity provision with other dealers, just as Fannie Mae could breach its loan agreements with other borrowers besides the Plaintiff, but absent an allegation that it had actually done so, no public interest is implicated by an allegation that the Defendants simply engaged in a private wrong as against only the Plaintiff. Accordingly, the Court finds that the Plaintiff has failed to state a claim under the Colorado Consumer Protection Act.
I. Negligent supervision
The Plaintiff alleges that the Defendants are liable for failing to properly supervise their employees, who in turn mismanaged the Plaintiff's loan and violated the loan agreements. Without engaging in an extensive discussion of the tort of negligent supervision, the Court observes that liability for negligent supervision lies only where the improperly-supervised employee causes harm by acting outside the scope of employment. Smith v. Multi-Financial Securities Corp., 171 P.3d 1267, 1271 (Colo. App. 2007). This is a logical element: when the employee is acting within the scope of his employment, the employer is liable for any wrongs that the employee commits under the doctrine of respondeat superior, and thus, a remedy in tort is required only when the employee strays from his job duties and takes wrongful actions that the employer did not request, but which the employer could reasonably have foreseen. Id. Here, the Plaintiff does not allege (nor do the Defendants) that the Defendants' employees' actions in handling the loan were not authorized by the Defendants and fell outside the scope of the employees' duties. Under these circumstances, no claim for negligent supervision lies.
J. Colorado Organized Crime Control Act
Finally, the Court turns to the Plaintiff's pleading of a violation of the Colorado Organized Crime Control Act. C.R.S. § 18-17-106(7) provides for a civil remedy for any person injured by what would otherwise constitute a criminal violation of the Act, C.R.S. § 18-17-104. Distilled to its essence, to plead a claim under that Act, the Plaintiff must allege that the Defendants: (i) joined with one another or third parties to form an "enterprise," (ii) that the enterprise engaged in a "pattern of racketeering activity." C.R.S. § 18-17-104(3). An "enterprise" is simply any association in fact of any two or more persons or entities, whether constituting a legally-chartered entity or simply an association in fact. C.R.S. § 18-17-103(2). A "pattern of racketeering activity" is established by showing that at least two acts of "racketeering activity," as that term is defined in C.R.S. § 18-17-103(5) were committed by a member of the enterprise, and that those predicate acts of racketeering activity which "relate to the conduct of the enterprise." People v. Chaussee, 880 P.2d 749, 757-58 (Colo. 1994). "Racketeering activity" under C.R.S. § 18-171-103(5) include all acts defined as such by 18 U.S.C. § 1961(1)(A)-(D), such as violent felonies and federal mail and wire fraud, and certain specified crimes under Colorado law, including violent felonies and theft under C.R.S. § 18-4-401. The statute was modeled after the federal RICO Act, 18 U.S.C. 1961 et seq., and is generally interpreted according to the same principles, unless Colorado courts have expressly construed the state statute otherwise. People v. Hoover, 165 P.3d 784, 798 (Colo. App. 2006).
The Defendants contend, among other things, that the Plaintiff has not adequately pled a "pattern of racketeering activity." The Plaintiff contends that it has pled predicate acts of mail fraud and theft. For the reasons stated above, the Court finds that the Plaintiff has failed to adequately plead any fraudulent statement, and thus, has failed to adequately plead a predicate act of mail or wire fraud. That leaves allegations of theft. At best, the Amended Complaint alleges that the Defendants converted money belonging to the Plaintiff when they failed to disburse funds in the escrow account to contractors or to the Plaintiff. Assuming — without necessarily finding — that the Defendants' alleged exercise of improper dominion over the funds in the escrow account constituted "theft" under Colorado law, that constitutes only a single act of racketeering activity. To plead a "pattern" of such activity, the Plaintiff must allege two or more acts. Because, at best, the Plaintiff alleges only one instance in which the Defendants committed theft of the escrowed funds, the Plaintiff has failed to adequately plead a claim under the Organized Crime Control Act.
The Plaintiff also alleges predicate acts of "conspiracy." A conspiracy must have, as its object, some criminal conduct in order to constitute a predicate act of racketeering. The Plaintiff has not identified what discrete criminal activities these "conspiracies" engaged in, and thus, the Court limits its analysis to specifically-alleged criminal acts in determining whether the Plaintiff has pled a pattern of racketeering activity.
Contractually, the Plaintiff agreed to give dominion over the escrow account to the Defendants, and conferred upon the Defendants considerable discretion as to when and how to disburse the funds. Even assuming that the Plaintiff can show that the Defendants abused that discretion, thereby breaching the parties' contract, the scienter element required for proof of the crime of theft is considerably higher.
CONCLUSION
For the foregoing reasons, the Defendants' Motion for Judgment on the Pleadings (# 46) and Motion to Dismiss the First Amended Complaint (# 67) are GRANTED IN PART, insofar as the Plaintiff's claims for fraud, breach of fiduciary duty, tortious interference with contract, abuse of process, violation of the Colorado Consumer Protection Act, negligent supervision, and violation of the Colorado Organized Crime Control Act are DISMISSED for failure to state a claim, and DENIED IN PART, insofar as the Plaintiff has adequately pled claims against both Defendants for tortious interference with prospective business advantage and breach of contract/breach of the covenant of good faith and fair dealing, as set forth herein.
Dated this 12th day of August, 2010