Opinion
Civil Action No. 3:01-CV-0597-D
December 10, 2001
MEMORANDUM OPINION AND ORDER
In this action by respondents-counterplaintiffs BLF, Ins.Mkters, Inc. ("BLF"), L. Dentón Fox ("Fox"), Paul R. Lowe ("Lowe"), and Kenneth W. Baker ("Baker") against petitioner-counterdefendant Hannover Life Reassurance Company of America, f/k/a/ Reassurance Company of Hannover ("Hannover") alleging claims for fraud, negligent misrepresentation, negligence, interference with business relations, breach of contract, and violations of the Texas Deceptive Trade Practices-Consumer Protection Act ("DTPA"), Tex. Bus. Com. Code Ann. §§ 17.41-17.826 (Vernon 1987 Pamp. Supp. 2002), Hannover moves to dismiss their first amended original counterclaim under Fed.R.Civ.P. 12(b)(6) for failure to state a claim on which relief can be granted. For the reasons that follow, the court grants the motion in part and denies it in part and orders counterplaintiffs to replead.
Although Hannover does not cite Rule 9(b) in the introduction to its motion and brief, see P. Mot. Dis. at 1, it also seeks dismissal of counterplaintiffs' fraud claim under that rule, see id. at 16.
I
As part of a reinsurance transaction, Hannover, BLF, Baker, Lowe, and Fox entered into a Facilitation Fee Agreement ("FFA"), under which counterplaintiffs agreed to make (or guarantied payment of) certain installment payments to Hannover. The FFA contained an arbitration clause that Hannover invoked when the required payments were not made, initiating proceedings between Hannover and counterplaintiffs. The arbitrators awarded Hannover $662,553.00 from BLF, $220,851.00 from each of Fox, Lowe, and Baker, and $530,357.00 from BLF, Fox, Lowe, and Baker, subject to their entitlement to credits based on payments made by other parties.
In the arbitration proceeding, counterplaintiffs did not contest the fact that substantial payments were owed under the FFA. Instead, they contended by way of three counterclaims that Hannover was liable to them in a greater amount because of misrepresentations that induced them to execute the FFA, and because it damaged their business through mismanagement after it acquired control of Benefit Life Insurance Company ("BLICO") via its position as principal creditor. The panel dismissed on the merits the third counterclaim, in which counterplaintiffs asserted that Hannover had misled them into entering into the FFA. It concluded that it lacked jurisdiction under the FFA arbitration clause to consider the first and second counterclaims.
By July 25, 2001 order, this court confirmed the arbitration award and denied counterplaintiffs' motion to vacate the award and dismiss Hannover's application to confirm the award. See July 25, 2001 Order at 5. Counterplaintiffs had filed a counterclaim (denominated "original complaint") that Hannover moved to dismiss under Rules 12(b)(6) and 9(b). The court allowed counterplaintiffs to amend their counterclaim to allege causes of action for negligence, negligent and intentional misrepresentation, and intentional interference with business relationships, after which Hannover could move anew to dismiss. Id. at 5-6. Counterplaintiffs have now amended to allege claims for fraud, negligent misrepresentation, negligence, interference with business relations, breach of contract, and violations of the DTPA.
According to the amended counterclaim, Baker, Lowe, and Fox own BLF Inc., an insurance marketing firm, and formerly owned BLICO. BLF Inc. had an exclusive marketing agreement with BLICO. BLICO needed reinsurance, which it obtained from Hannover. Hannover induced Counterplaintiffs to enter into the transaction by misrepresenting that it would provide them additional business opportunities, provide needed financial assistance and necessary business expertise to make BLICO profitable, and exercise its contractual rights in a manner that promoted BLICO's and Counterplaintiffs' profitable growth.
For purposes of deciding Hannover's motion to dismiss, the court accepts as true the facts that Counterplaintiffs allege in their amended counterclaim and draws all inferences in favor of Counterplaintiffs as the nonmovants. See Royal Bank of Can. v. FDIC, 733 F. Supp. 1091, 1094 (N.D. Tex. 1990) (Fitzwater, J.).
BLICO was experiencing claims processing backlogs in 1996-97. This rendered its staff unable to keep pace with marketing and prompted a search for a capable third-party administrator ("TPA"). Baker, Lowe, and Fox contacted Bill Lewis ("Lewis"), who had previously performed actuarial services for them and owned Central Security Life Ins. Co. ("CSL"). Lewis offered to serve as TPA and to clear BLICO's backlog within 4½ months. BLICO also needed reinsurance to complement the third-party administration and return BLICO to its former level of efficiency and potential for profitability. Lewis advised Baker, Lowe, and Fox that he had connections with Hannover. He arranged the negotiations among Baker, Lowe, and Fox, BLICO, and Hannover that resulted in reinsurance contracts. As part of the reinsurance transaction and at Hannover's suggestion, counterplaintiffs also entered into the FFA, relying in doing so on Hannover's representations and conduct. Hannover demanded that BLICO contract with Lewis/CSL to serve as TPA and specified this requirement in its contracts with BLICO.
It is not always clear from the amended counterclaim whether Counterplaintiffs' references to "BLF" are to Baker, Lowe, and Fox or to BLF Inc. Because the amended counterclaim designates "BLF" as shorthand for Baker, Lowe, and Fox, see Am. Countercl. at ¶ 2.01, the court has assumed that this use is intended unless the context appears to refer to BLF Inc., see id. at ¶ 2.10(3) (referring to "BLF as the exclusive marketer").
Lewis informed BLICO that additional payments in excess of the TPA contract base amount would be necessary to catch up the backlog, but that, once current, additional payments would cease, they would revert to the base rate, and CSL would be responsible for preventing a recurrence of the backlog. Despite this representation, Lewis failed to administer BLICO's business properly. As his performance deteriorated, Hannover began delaying payments under the reinsurance contracts, which, in turn, resulted in millions of dollars of losses to BLICO and to its ultimate financial collapse. In September 2000 BLICO went into receivership.
At the end of 1997 BLICO lacked statutory minimum reserves and Baker, Lowe, and Fox had borrowed all the money possible for investment in the company. Lewis suggested a ceding allowance that effected the reinsurance of 75% of BLICO's annuities with Hannover. Hannover insisted that Baker, Lowe, and Fox execute personal guaranties. All parties acknowledged that Baker, Lowe, and Fox could not make the payments owed under the FFA without significantly increased commission income. Hannover senior management continually assured Baker, Lowe, and Fox that Hannover would provide them additional marketing opportunities to enable them to make payments, and they personally obligated themselves on substantial loans and spent hundreds of thousands of dollars in reliance on the promises and representations. In reliance on Hannover's misrepresentations, and as a result of its failure to perform its promises, counterplaintiffs borrowed and personally guarantied over $1 million, which they are now unable to repay.
For the arrangement to succeed, BLICO required a continually expanding market and Hannover's prompt and accurate reinsurance payments. Bill Walker, Victor Castellanos, Craig Baldwin, and Steve Najjar — members of Hannover senior management — fraudulently or negligently made agreements and representations that encouraged Baker, Lowe, and Fox to borrow the maximum amount possible on BLICO's behalf; demanded and received payments under the FFA before execution of the agreement; acknowledged that the agreement could not be performed without Hannover's active participation in BLICO's expansion, including additional marketing opportunities that Hannover created and its prompt payment of sums owed under the reinsurance agreements; represented that Hannover would enter into reinsurance agreements with other clients and specify BLF Inc. as the exclusive marketer; and Hannover's effective control of BLICO would be exercised in a reasonable manner, advancing money when necessary, promptly funding payables, and taking other necessary action to ensure, to the greatest degree possible, BLICO's continued viability and growth. Hannover failed, however, to provide additional markets and delayed payment of, or did not pay, reinsurance monies that were critical to BLICO's continued operation.
See supra note 3.
Counterplaintiffs allege that Hannover also acted negligently in exercising its decisionmaking powers over BLICO, which, in turn, contributed to the company's collapse, destroyed the sole income of Baker, Lowe, and Fox, and caused the loss of millions of dollars in commissions and their equity in BLICO. They maintain that Hannover's principal negligence was compelling them and BLICO to retain Lewis/CSL as BLICO's TPA when Hannover knew, or should have known, of their malfeasance. Because of Hannover's negligent control of BLICO, Lewis/CSL damaged counterplaintiffs and BLICO to a greater extent than would otherwise have occurred.
After the TPA's malfeasance, negligence, and intentional nonperformance were discovered, counterplaintiffs insisted that the BLICO-CSL contract be terminated, but Hannover refused to consent, causing them to sustain millions of dollars in losses. Hannover also altered its course of dealing, which deprived counterplaintiffs of adequate funds to pay BLICO policyholders. Counterplaintiffs relied on Hannover's assurances and promises and lost millions of dollars as a result of its misrepresentations and failure to perform its agreements.
Counterplaintiffs allege both that they "insisted" on termination of the contract, see Am. Countercl. at ¶ 2.03, and that they "attempted to persuade Hannover to permit BLICO to terminate its contract," id at ¶ 2.04.
Hannover moves to dismiss counterplaintiffs' causes of action for failure to state a claim on which relief can be granted, and it moves to dismiss their fraud claim for failing to comply with Rule 9(b).
II A
Hannover contends that counterplaintiffs' claims for fraud and negligent misrepresentation must be dismissed for failure to state a claim because they are barred by res judicata. In its reply brief, it clarifies that it seeks dismissal of any claims "that Hannover's alleged fraudulent or negligent misrepresentations induced [counterplaintiffs] into entering into the [FFA]." P. Rep. Br. at 4; see id. at 2 ("Hannover's res judicata argument is premised on the simple notion that any allegations that [counterplaintiffs] were `misled' into entering the [FFA] are precluded." (emphasis in original)).
Cf. P. Mot. Dis. at 16 ("In the event that [counterplaintiffs'] allegations somehow support a fraud claim not based on inducement of the [FFA], [counterplaintiffs] still fail to state a claim for fraud pursuant to Rules 9 and 12(b)(6) of the Federal Rules of Civil Procedure." (emphasis added)).
The arbitration panel rejected on the merits counterplaintiffs' third counterclaim, in which they asserted that Hannover induced them to into enter the FFA by making misrepresentations. Hannover cites counterplaintiffs' position statement in arbitration, in which they alleged that Hannover's negligent/intentional misrepresentations induced the execution of the FFA. The arbitrators concluded that counterplaintiffs "freely entered into the [FFA]" and were not misled into doing so. P. App. 9.
Counterplaintiffs do not dispute that the doctrine of res judicata can apply. Instead, they appear to argue that the scope of the arbitrators' ruling dismissing their third counterclaim does not preclude fraud and negligent misrepresentation claims based on allegations that Hannover failed to deliver on certain of its promises or that Hannover negligently exercised control over BLICO. They urge that these components of their fraud and negligent misrepresentation claims should not be dismissed based on res judicata. And they posit that failing to deliver on promises is a shorthand rendition describing fraud, negligent misrepresentation, negligence, interference with business relations, breach of contract, and violations of the DTPA.
Under Texas law, claims for fraud and for negligent misrepresentation both require reliance. See Beijing Metals Minerals Import/Export Corp. v. Am. Bus. Ctr. Inc., 993 F.2d 1178, 1185 (5th Cir. 1993) (Texas law) (reciting elements of fraud cause of action to include requirement that plaintiff acted in reliance upon false, material representation); Fed. Land Bank Ass'n of Tyler v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991) (stating that one element of negligent misrepresentation claim is that plaintiff suffered pecuniary loss by justifiably relying on representation). The arbitrators' decision that counterplaintiffs were not misled precludes these claims in the present suit, to the extent they are based on the contention that Hannover, by fraud or negligent misrepresentation, induced counterplaintiffs to enter into the FFA. The court dismisses the claims to this extent.
Hannover relies in its brief on Texas law, without waiving the right to rely later in the case on Florida law, which it concedes is "very similar to Texas law." See P. Mot. Dis. at 8 n. 6.
It is arguable, however, that counterplaintiffs' fraud and negligent misrepresentation claims are framed more broadly. The amended counterclaim explicitly bases the fraud and negligent misrepresentation claims on misrepresentations asserted earlier in the pleading, see Am. Countercl. at ¶¶ 3.01, 3.02, and these alleged misrepresentations appear to relate to matters other than inducing entry into the FFA. For example, counterplaintiffs allege that Hannover represented that it would enter into reinsurance agreements with other clients and specify BLF Inc. as the exclusive marketer, and that its effective control of BLICO would be exercised in a reasonable manner, advancing money when necessary, promptly funding payables, and taking other necessary action to ensure, to the greatest degree possible, BLICO's continued viability and growth. See id. at ¶ 2.10. It is unclear at this juncture that these allegations refer to inducements to enter into the FFA, so that they are barred by res judicata under Hannover's application of the doctrine.
B
Hannover argues that any aspects of counterplaintiffs' claims for fraud and negligent misrepresentation that are not barred by res judicata must be dismissed for failure to state a claim under 12(b)(6) (and, concerning the fraud claim, under Rule 9(b)).
1
The court turns first to the question whether counterplaintiffs have met the requirements of Rule 9(b).
A pleading that sounds in fraud must provide the time, place, and contents of the false representations, and the identity of the person making the misrepresentation and what that person obtained thereby. See Williams v. WMX Techs., Inc., 112F.3d 175, 177(5th Cir. 1997). Rule9(b) thus imposes a heightened pleading standard that requires, at a minimum, that the plaintiff state the "who, what, when, where, why, and how" of the alleged fraud. Askanase v. Fatjo, 130 F.3d 657, 676 (5th Cir. 1997). In certain respects, counterplaintiffs' amended counterclaim is sufficient. See, e.g., Am. Countercl. at ¶ 2.10(1)-(4) (identifying contents of alleged false agreements and representations). In other respects, however, it is not. Rather than address the amended counterclaim line by line, the court will illustrate the deficiencies by citing examples, and will leave it to counterplaintiffs to comb the balance of the pleading for assertions that must be augmented in order to comply with Rule 9(b).
In no (or in only few) instances have counterplaintiffs pleaded the time and place where fraud occurred or what the person who made the misrepresentation obtained thereby. See Am. Countercl. at ¶¶ 2.01-2.13. In at least one instance, they have identified the "person" who made the misrepresentation by naming four members of Hannover senior management and then apparently asserting that they all made the alleged misrepresentation. See id. at ¶ 2.10.
Accordingly, the court concludes that the fraud claim does not comply in all respects with Rule 9(b) and that counterplaintiffs must amend.
Hannover maintains that counterplaintiffs should not be permitted to amend since they have already amended once. Because they amended at their own request rather than in response to a court order, and because their current amended counterclaim does not represent a failed attempt to comply with an order directing them to replead, the court rejects Hannover's position.
2
The court considers next whether counterplaintiffs' claims for fraud and negligent misrepresentation should be dismissed pursuant to Rule 12(b)(6)."[T]he motion to dismiss for failure to state a claim is viewed with disfavor and is rarely granted." Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982) (quoting Charles A. Wright Arthur R. Miller, Federal Practice and Procedure § 1357, at 598 (1969)). "[Dismissal of a claim on the basis of barebones pleadings is a `precarious disposition with a high mortality rate.'" Id. (quoting Barber v. Motor Vessel "Blue Cat," 372 F.2d 626, 627 (5th Cir. 1967)). "The court may dismiss a claim when it is clear that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Jones v. Greninger, 188 F.3d 322, 324 (5th Cir. 1999) (per curiam) (citing Fee v. Herndon, 900 F.2d 804, 807 (5th Cir. 1990)). "In analyzing the complaint, [the court] will accept all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff Id. (citing Doe v. Hillsboro Indep. Sch. Dist, 81 F.3d 1395, 1401 (5th Cir. 1996)). "The issue is not whether the plaintiff will ultimately prevail, but whether he is entitled to offer evidence to support his claim." Id. (citing Doe, 81 F.3d at 1401). "Thus, the court should not dismiss the claim unless the plaintiff would not be entitled to relief under any set of facts or any possible theory that he could prove consistent with the allegations in the complaint." Id. (citing Va nder Zee v. Reno, 73 F.3d 1365, 1368 (5th Cir. 1996)).
Under the highly deferential standard of Conley v. Gibson, 355 U.S. 41, 45-46 (1957), and viewing the allegations of the amended counterclaim in the light most favorable to counterplaintiffs for purposes of deciding the motion to dismiss, see, e.g., Royal Bank of Canada v. FDIC, 733 F. Supp. 1091, 1094 (N.D. Tex. 1990) (Fitzwater, J.), the court is unable to say that they can prove no set of facts, consistent with the allegations, that would entitle them to relief. The court therefore denies the motion to dismiss counterplaintiffs' claims for fraud and negligent misrepresentation except to the extent set forth supra at § II(A).
III
Hannover maintains that counterplaintiffs cannot recover for breach of oral contract because (1) they have failed adequately to plead the elements of a breach of contract claim; (2) there are no valid written contracts between them and Hannover, any claim that Hannover breached the FFA is barred by res judicata based on the arbitrators' decision, and the only other contracts are the reinsurance contracts between Hannover and BLICO (who is not a party to this case), not Hannover and counterplaintiffs; (3) no valid oral contracts exist between Hannover and counterplaintiffs, and counterplaintiffs have not pleaded the elements of a valid oral contract; and (4) the written agreements (the FFA and reinsurance agreements) supersede any alleged oral agreements because the FFA and reinsurance agreements contain integration clauses.Because it is unclear from the counterclaim who counterplaintiffs contend are the parties to the contracts and what are the essential terms of the agreements, the court cannot determine whether they have failed to state a claim. The court therefore orders counterplaintiffs to replead this cause of action.
Although counterplaintiffs' breach of contract claim permissibly incorporates allegations set out earlier in the counterclaim, the claim itself consists of but three sentences. The second contends that Hannover's breach caused counterplaintiffs damage, and the third asserts a right to recover attorney's fees. See Am. Countercl. at ¶ 3.05. In the first sentence, they allege that "Hannover, through its managerial agents as described above, contracted and agreed with [counterplaintiffs] as stated above and thereafter breached the agreements made and refused to perform the terms of the verbal contracts." Id. The court cannot determine from this allegation who counterplaintiffs maintain are the parties to the contracts and the relevant contractual terms that allegedly were breached.
Counterplaintiffs' response to Hannover's motion to dismiss does not clarify the matter. They assert:
[Counterplaintiffs] are not suing on behalf of [BLICO] nor are they suing for breach of the reinsurance contracts. [Counterplaintiffs] are suing Hannover for breach of contracts made between Baker, Lowe and Fox and the executive officers of Hannover.
Rs. Resp. at 18. Apparently, then, not all Counterplaintiffs are suing for breach of contract, and the ones who are-Baker, Lowe and Fox-are suing Hannover for breach of oral contracts that they maintain the executive officers entered into with them on behalf of Hannover. Moreover, the court is unable to determine what are the alleged terms of the contracts that supposedly were breached. Until the court can ascertain these pertinent matters, it cannot say that BLF has stated a claim on which relief can be granted.
Although Counterplaintiffs do not explicitly address Hannover's res judicata argument in their response, they apparently oppose application of the doctrine on the ground that they are not suing Hannover for breaching the FFA.
Accordingly, the court directs counterplaintiffs to replead this claim.
The court rejects Hannover's contention that the breach of contract claim should be dismissed as barred by the statute of frauds. Although Rule 12(b)(6) dismissal can be based upon an affirmative defense, the defense must appear on the face of the pleadings. See Kansa Reinsurance Co. v. Congressional Mtg. Corp., 20 F.3d 1362, 1366 (5th Cir. 1994). Therefore, where, as here, the statute of frauds is urged as a defense, Rule 12(b)(6) dismissal should not be granted unless the defense is established by the face of the complaint.
IV
Hannover moves to dismiss Counterplaintiffs' negligence claim. It contends that their cause of action is based on two primary allegations: that Hannover negligently required BLICO to use and continue to use Lewis as TPA, and that Lewis negligently performed his duties as TPA. Hannover argues that Counterplaintiffs assert only breach of a duty by it and Lewis to BLICO, not to counterplaintiffs, and that, even if they have asserted breach of a duty to them, they have failed to plead adequately that Hannover was negligent. Counterplaintiffs respond that Hannover had a right of control over BLICO and thus had the duty to exercise such control reasonably. They also posit that Hannover had a duty to refrain from negligently damaging them in the exercise of its right of control over BLICO.The court cannot say, from its deferential review of the counterclaim alone, that counterplaintiffs can prove no set of facts in support of this claim that would entitle them to relief. It therefore denies this ground of Hannover's motion.
V
Hannover moves to dismiss counterplaintiffs' claim for interference with business relations on the grounds that they have failed adequately to plead the claim and have failed to show that any interference was not justified or privileged.
The court cannot say, from its deferential review of the counterclaim alone, that counterplaintiffs can prove no set of facts in support of this claim that would entitle them to relief. It therefore denies this ground of Hannover's motion.
VI
Finally, Hannover moves to dismiss counterplaintiffs' DTPA cause of action. It argues that the DTPA does not apply because the transaction involves consideration in excess of $500,000, and that counterplaintiffs do not qualify as consumers under the DTPA because the transactions between BLICO and Hannover were primarily monetary.
The premise for Hannover's contention that § 17.49(g) of the DTPA — the $500,000 cap — applies is the fact that counterplaintiffs sue in their counterclaim for approximately $2.3 million in damages. It does not follow inexorably, however, from counterplaintiffs' prayer for direct and consequential damages of approximately $2.3 million that the "transaction," "project," or "set of transactions relating to the same project" involved "total consideration" of more than $500,000. This is so because damages caused by wrongful conduct can exceed the consideration involved in a transaction. Because the court cannot determine from the face of the complaint that this limit has been exceeded, it declines to dismiss the claim on this basis at the Rule 12(b)(6) stage.
Nor can the court say from its deferential review of the counterclaim that counterplaintiffs are not consumers because the transactions were primarily monetary ones that did not involve the purchase of services.
The court therefore declines to dismiss counterplaintiffs' DTPA claim.
* * *
For the reasons stated, Hannover's September 20, 2001 motion to dismiss respondents' first amended original counterclaim is granted in part and denied in part, and counterplaintiffs are directed to replead within 30 days of the date this memorandum opinion and order is filed.
SO ORDERED