Opinion
Case No. 10-31906 Adv. No. 11-3014
03-09-2012
In re: WILLIAM D. UPDEGRAFF JESSICA M. UPDEGRAFF, Debtors WILLIAM D. UPDEGRAFF, ET AL., Plaintiffs v. BENEFICIAL OHIO, INC., ET AL., Defendants
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
___________
Lawrence S. Walter
United States Bankruptcy Judge
Judge L. S. Walter
Chapter 13
DECISION OF THE COURT GRANTING, IN PART, AND DENYING, IN PART,
DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS
The matter is before the court on a motion for judgment on the pleadings filed by Defendants HSBC Finance Corp. ("HSBC") and Beneficial Ohio, Inc. ("Beneficial") [Adv. Doc 13 redocketed as Adv. Doc. 17]. A response was filed by Plaintiff-Debtors William and Jessica Updegraff ("the Updegraffs") [Adv. Doc. 19] and Defendants HSBC and Beneficial filed a joint reply [Adv. Doc. 21].
On January 6, 2011, the Updegraffs filed a complaint with five claims basically alleging that Defendants HSBC and Beneficial (collectively "Defendants") violated federal and state law by failing to provide required notices, inflating appraisal values and making false promises with respect to the mortgage loan on the Updegraffs' residence. After filing their answer, the Defendants filed a motion for judgment on the pleadings pursuant to Fed. R. Civ. p. 12(c) asserting various reasons why the Updegraffs failed to state plausible claims for relief in their complaint.
The five causes of action include: 1) violations of the Truth in Lending Act ("TILA") for Defendants' failure to provide required notices and failure to disclose certain fees during the loan closing; 2) Defendants' fraudulent inducement of the Updegraffs to accept a loan with a higher interest rate by inflating the appraisal value of their residential property and falsely promising that Beneficial would refinance the loan at a lower interest rate after the Updegraffs made 12 timely monthly payments on the loan; 3) Defendants' breach of the implied covenant of good faith and fair dealing for the same failure to refinance at a lower interest rate pursuant to their promise; 4) Defendants' improper rejection of the Updegraffs' attempt to rescind the mortgage loan because of the alleged TILA violations; 5) Defendants' negligent misrepresentations related to the inflated property appraisal and the false offer to refinance the loan at a lower interest rate after 12 months.
After careful review of the parties' briefing, the court concludes that judgment on the pleadings should be granted to the Defendants on the Updegraffs' third claim, for breach of the implied covenant of good faith and fair dealing, because it is barred by the applicable statute of frauds. However, in all other respects, the Defendants' motion for judgment on the pleadings must be denied.
FACTUAL AND PROCEDURAL BACKGROUND
The Updegraffs filed a Chapter 13 bankruptcy petition on March 30, 2010 and subsequently filed an adversary complaint against Defendants regarding the loan and mortgage on their residential property. Because this matter is before the court on Defendants' motion for judgment on the pleadings, the following facts found in the Updegraffs' complaint are deemed true.
A. Factual Allegations in the Complaint
1. The Loan
Defendants Beneficial and HSBC are corporations providing residential mortgage loan financing and servicing to individuals in the State of Ohio [Adv. Doc. 1, ¶¶2-3]. In 2004, Beneficial became a subsidiary or a brand name of HSBC and was under its corporate control [Id.].
In early July of 2007, the Updegraffs visited the office of John Bierly, a loan officer for Beneficial, for a car loan [Id., ¶ 6]. During the visit, John Bierly informed the Updegraffs that Beneficial could also refinance the mortgage loan that the Updegraffs obtained when they purchased their home at 405 East Cherry Street in New Paris, Ohio [Id.]
On July 20, 2007, Bierly originated a note and mortgage for the Updegraffs with Beneficial as the lender and owner [Id., ¶ 7 and Exs. 1 and 2]. The principal amount of the loan was $66,357.41 to be paid over a 25 year term at an interest rate of 11.41% per annum [Id.]. At the time of the loan origination, Bierly told the Updegraffs that if they agreed to a loan at an interest rate more than 3% higher than the originally promised 8% per annum, Beneficial would refinance the loan after 12 consecutive months of timely payments [Id., ¶ 8].
The Updegraffs made timely consecutive payments starting on or about August 20, 2007 and continued to do so for 12 months in reliance on their understanding that the loan would be refinanced at a lower rate [Id., ¶ 37]. In July of 2008, after twelve timely payments, the Updegraffs visited Beneficial's Huber Heights offices to refinance the loan as promised by Bierly [Id., ¶ 38]. However, Bierly had been terminated by Beneficial and the Updegraffs were directed to speak with other agents of Beneficial with whom the Updegraffs had no prior contact [Id., ¶ 39]. These agents denied the Updegraffs' request for a new loan with a lower interest rate despite the fact that they made twelve months of timely payments [Id., ¶¶ 39-40].
2. The Appraisal of the Property Using Comparables
As part of the loan processing, Beneficial obtained a quick pricing broker price valuation (Automated Valuation Model- "AVM") of allegedly comparable residential properties in Eaton Ohio from an alleged third party First American Res Corporation ("First") [Id., ¶ 9]. Beneficial used the AVM to establish a value of the Updegraffs' property at $79,000 [Id., ¶ 10 and Ex. 3]. The AVM used by Beneficial was computer generated by First without any physical observation of the property or the comparables and without verification of the property listing [Id., ¶ 11]. The properties and their valuations used as comparables in the AVM are listed in the Updegraffs' complaint [Id., ¶ 12]. The Updegraffs assert that these comparables are not similar to or located near the Updegraffs' real property [Id., ¶ 15].
Following the filing of the Chapter 13 case, the Updegraffs' property was valued for an appraisal in the bankruptcy case based on a different set of comparables that are all on the same street as the Updegraffs' property [Id., ¶¶ 13-14]. The more recent valuation of the Updegraffs' property is $43,000 which is lower than the value established by the AVM [Id., ¶¶ 10, 13 and Exs. 3 and 4]. The AVM sales values used by Beneficial in support of the Loan to Value (LTV) rates for the loan given to the Updegraffs exceeded the reasonable average value of comparable properties listed in the Chapter 13 appraisal by 69% [Id., ¶ 18].
The Updegraffs contend that Defendants knew or should have known that the comparables used in the AVM were not realistic comparisons [Id., ¶ 17]. The use of these unrealistic comparables, according to the complaint, was to place the Updegraffs in a loan based on unreasonable LTV rates for the property [Id., ¶ 19]. The Updegraffs relied upon Beneficial's appraisal in agreeing to the loan because the loan was below what Beneficial told the Updegraffs was the appraised market value of the property [Id., ¶ 20]. Later, the Updegraffs discovered that they "could never be able to refinance the loan on the property by Beneficial because the appraisal used by Beneficial was substantially overstated in comparison to the actual value of their property at the time the loan was originated" [Id., ¶ 41].
3. The Finance Fees
According to the complaint, various fees charged to the Updegraffs for items relating to the loan closing and payable to third party agents of Beneficial were not appropriately listed as finance fees or finance costs of the loan [Id., ¶¶ 25-28]. The fees at issue include $55 for an appraisal, $50 for Tax Service Fees, and additional title charges of $135 and $78 [Id., ¶¶ 22-23 and Ex. 10, Lines 813, 809, 1101 and 1108]. According to the complaint, the Updegraffs paid these fees to Beneficial or Beneficial's agents [Id., ¶¶ 22-23].
4. Right to Cancel Notices
At the closing, the Updegraffs allege that they did not receive any copies of the "right to cancel notices" required to be given to each consumer and borrower under TILA requirements [Id., ¶¶31-34].
5. Attempt to Rescind the Mortgage
Because of the failure to receive the right to cancel notices and the failure to properly disclose the finance charges, the Updegraffs took action to rescind the loan transaction by sending letters to Beneficial and Beneficial's attorney dated March 30, 2010 [Id., ¶ 36 and Ex. 11]. The letters cited the failure to comply with material disclosure requirements as the reason for the rescission [Id.].
Beneficial replied to the Updegraffs by letter dated April 14, 2010 signed by J. Hauser, a customer resolution representative [Id., ¶ 43 and Ex. 12]. Enclosed with the letter were loan documents from Beneficial's loan files [Id.]. An item referenced or included in the documentation was one right to cancel notice [Id.]. Through this letter, Beneficial denied and rejected the Updegraffs' request to rescind the loan [Id., ¶¶ 44-45 and Ex. 12]. Due to the rejection of the Updegraffs' rescission attempt, the Updegraffs have incurred additional costs and fees including the filing of their Chapter 13 bankruptcy case [Id., ¶ 48].
B. Defendants' Answer and Motion for Judgment on the Pleadings
Following the filing of the complaint, the Defendants' filed a joint answer [Adv. Doc. 6]. In the answer, Defendants denied various allegations in the complaint and presented affirmative defenses [Id.]. However, Defendants did not attach any additional documents to the pleading [Id.]. Defendants subsequently filed their joint motion for judgment on the pleadings [Adv. Doc. 13 redocketed as Adv. Doc. 17]. Attached to the motion were two pieces of evidentiary material in the form of an Affidavit of Shehad Mohammed, Assistant Vice President in the Customer Resolution Department of HSBC, and a copy of a document entitled Notice of Right to Cancel dated July 20, 2007 with the purported signatures of the Updegraffs acknowledging that they received two copies of the notice [Id., Ex. A and Ex. 1]. According to the affidavit, the Notice of the Right to Cancel was part of Defendants' loan file kept in the course of regularly conducted business [Id., Ex. A, ¶ 3].
The affidavit also addresses facts relevant to the fee dispute. More specifically, Mohammed attests that the term "POCL" used on the Updegraffs' HUD settlement statement is a standard term used by financial services companies and real estate professionals to indicate that a certain fee or cost was paid by the lender rather than the borrower at closing [Id., ¶ 5]. The term POCL appears after the $55.00 appraisal fee, $50.00 Tax Service Fee and the two processing fees of $135.00 and $78.00 that appear on the HUD statement [Id., ¶ 6]. According to the affidavit, this designation signifies that Beneficial paid these fees at closing [Id.].
STANDARD FOR JUDGMENT ON THE PLEADINGS
Defendants request judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c), incorporated in bankruptcy adversary proceedings by Fed. R. Bankr. P. 7012. The motion is reviewed under the standard applicable to a Rule 12(b)(6) motion to dismiss for failure to state a claim. Ziegler v. IBP Hog Market, Inc., 249 F.3d 509, 511-12 (6th Cir. 2001); Michael v. Javitch, Block & Rathbone, LLP, __ F.Supp.2d __, 2011 WL 5554325, at *3 (N.D. Ohio Nov. 15, 2011). As such, the court is to construe the complaint in a light most favorable to the plaintiffs accepting all of the complaint's well pleaded factual allegations as true to determine whether the plaintiffs state a claim for relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009); Ziegler, 249 F.3d at 512. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1949. The plausibility standard is "not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (further citation omitted).
The factual allegations provided in the complaint need not be detailed. Id.; Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Instead, a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to give the defendant fair notice of what the claim is and the grounds upon which it rests. Fed. R. Civ. P. 8(a)(2) (incorporated in bankruptcy adversary proceedings by Fed. R. Bankr. P. 7008). See also Twombly, 550 U.S. at 555. Nonetheless, the facts provided must be sufficient to raise a right to relief "above the speculative level" and the plaintiff has the obligation to provide more than just "labels and conclusions" or a "formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555. See also Iqbal, 129 S.Ct. at 1949 (noting that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice").
In assessing the complaint, the court must keep in mind that it is to test the legal sufficiency of the plaintiff's claims for relief and not to weigh the evidence. Perry v. United Parcel Serv., 90 Fed. Appx. 860, 2004 WL 193203, at *1 (6th Cir. Jan. 30, 2004); Armengau v. Cline, 7 Fed. Appx. 336, 2001 WL 223857, at *5 (6th Cir. March 1, 2001). Therefore, when deciding the motion, the court "may consider only matters properly a part of the complaint or pleadings." Armengau, 2001 WL 223857, at *5. See also Kostrzewa v. City of Troy, 247 F.3d 633, 643-44 (6th Cir. 2001).
LEGAL ANALYSIS
A. First and Fourth Claims (TILA Related): Consideration of Evidentiary Materials Outside the Pleadings
The court begins with the Defendants' arguments for judgment on the pleadings with respect to the Updegraffs' First and Fourth Claims alleging that certain acts and omissions by the Defendants were in violation of the Truth in Lending Act ("TILA"). In their motion, Defendants do not argue that the facts alleged fail to state plausible claims for TILA violations. Instead, Defendants dispute the veracity of the factual allegations themselves by relying on documentary evidence attached to their motion. Thus, the critical preliminary issue that the court must determine is whether this evidentiary material may be considered on a motion for judgment on the pleadings.
To summarize the relevant complaint allegations, the Updegraffs essentially allege three acts and omissions in violation of statutory TILA provisions: 1) Defendants failed to properly disclose certain fees paid by the Updegraffs at closing; 2) Defendants failed to provide the Updegraffs with copies of the notice of right to cancel; and 3) Defendants improperly rejected the Updegraffs' attempt to rescind the loan.
The Truth in Lending Act ("TILA") was enacted by Congress to "assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." 15 U.S.C. § 1601(a). To meet this purpose, TILA requires that a creditor in a consumer transaction disclose various items of information. See, e.g., 15 U.S.C. §§ 1635, 1637-1638. Furthermore, TILA generally permits a borrower to rescind a loan transaction that results in the creditor taking a security interest in the borrower's principal dwelling. 15 U.S.C. § 1635(a). The creditor must "clearly and conspicuously disclose" the borrower's rescission rights and two copies of the notice of the right to rescind must be provided to each borrower. Id.; 12 C.F.R. § 226.23(b) (also known as "Regulation Z"). Depending on whether the lender properly delivers these notices, the borrower's right to rescind may last only three days or be extended to three years if the notice and/or other material disclosures are not delivered. 15 U.S.C. § 1635(a) and (f); 12 C.F.R. § 226.23(a)(3).
The documents relied on by the Defendants consist of an affidavit of an HBSC employee ("HSBC Affidavit") and a copy of a document entitled Notice of Right to Cancel ("Notice"). The Notice contains the purported signatures of the Updegraffs acknowledging their receipt of two copies of the required TILA notice [Adv. Doc. 13 redocketed as Adv. Doc. 17, Ex. 1] which is used by Defendants to directly contradict the Updegraffs allegations supporting the First and Fourth Claims in the complaint [Adv. Doc. 1, ¶¶ 33, 58, 78]. The other document is the HSBC Affidavit with which the Defendants attempt to prove that certain allegedly undisclosed fees at closing were paid by the Defendants rather than the Updegraffs [Id., Ex A, ¶¶ 5-6]. The statements in the affidavit contradict the Updegraffs' factual allegations supporting the First Claim in the complaint [Adv. Doc. 1, ¶¶ 22-23, 59]. While these documents are attached to the Defendants' motion, they are not attached to Updegraffs' complaint or the Defendants' answer.
The failure to provide the proper number of notices not only violates TILA directly, but also lengthens the time that a borrower has to rescind the mortgage loan. 15 U.S.C. § 1635(a) and (f); 12 C.F.R. § 226.23(a)(3). Consequently, whether the Updegraffs received the proper notices is critical not only to the First Claim, but also to their claim for rescission which is the Fourth Claim of the complaint.
As noted previously, when deciding a motion for judgment on the pleadings, the court is to test the legal sufficiency of the plaintiff's claims for relief and not to weigh the evidence. Perry, 2004 WL 193203, at *1; Armengau, 2001 WL 223857, at *5. When deciding the motion, the court is limited to considering the content of the complaint although the court may also consider matters of public record and exhibits attached to the complaint. Michael, _ F.Supp.2d __, 2011 WL 5554325, at *3. See also Kostrzewa, 247 F.3d at 643-44; Armengau, 2001 WL 223857, at *5. In limited circumstances, a party may consider documents attached to a motion to dismiss or for judgment on the pleadings if the documents are referred to in the plaintiffs' complaint and are central to the claims. Whittiker v. Deutsche Bank Nat'l Trust Co., 605 F.Supp.2d 914, 924 (N.D. Ohio 2009). Outside of these circumstances, the extraneous material must be excluded or, if considered, the motion must be treated as one for summary judgment under Fed. R. Civ. P. 56 and the parties must be provided additional notice and an opportunity to supplement the record. Kostrzewa, 247 F.3d at 643-44.
With minimal discussion in a footnote, Defendants argue that consideration of the HSBC Affidavit and the Notice is permitted because courts may consider written instruments attached to the complaint and, although these particular documents are not so attached, they are part of the same "loan file" as other instruments that were attached to the complaint [Adv. Doc. 13, p. 4 n.1]. The court disagrees with this argument. First, having a document purportedly from the same "loan file" as a document attached to the complaint is not an exception to the rule excluding extraneous materials on a motion for judgment on the pleadings. Nor, for that matter, do the Defendants cite any rules or case law to support that notion.
Even if such an exception existed, the HSBC Affidavit is not part of the "loan file" documenting the loan transaction between Defendants and the Updegraffs. Instead, this affidavit was recently created following the filing of the adversary proceeding for the purpose of refuting factual allegations in the Updegraffs' complaint. Defendants have provided this court with no legitimate basis for considering this type of extraneous evidentiary material in conjunction with a motion for judgment on the pleadings and, consequently, the court will not consider it.
The Notice purportedly containing the Updegraffs' signatures is a closer matter. Unlike the affidavit, the Notice is referred to in the Updegraffs' complaint as a document from Beneficial's loan files that the Updegraffs became aware of when the Notice was either sent to them or at least referred to in a letter from Beneficial denying their request to rescind [Adv. Doc. 1, ¶ 43]. As noted before, a court may consider extraneous evidence attached to a motion for judgment on the pleadings when the document is referred to in the complaint and is central to the plaintiffs' claims. Whittiker, 605 F.Supp.2d at 924. While the Notice appears to meet this criteria, the court agrees with the Updegraffs that the weight and relevance of this document remains in dispute making it inappropriate to consider at this early stage in the litigation.
More specifically, TILA provides that borrowers like the Updegraffs may rebut any presumption created by a written acknowledgement of receipt of disclosures such as the Notice attached to Defendant's motion. Section 1635(c) of TILA states:
Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required under this subchapter by a person to whom information, forms, and a statement is required to be given pursuant to this section does no more than create a rebuttable presumption of delivery thereof.15 U.S.C. § 1635(c). Consequently, even if the court were to consider the Notice, the Updegraffs may rebut any presumption of delivery created by the Notice with testimony or other evidence. Cappuccio v. Prime Capital Funding LLC, 649 F.3d 180, 189-90 (3rd Cir. 2011) (noting that the testimony of a borrower alone may overcome the "weak" presumption created by § 1635(c)). Because the § 1635(c) rebuttable presumption requires a court to consider and weigh evidence to make the determination of whether the presumption is rebutted, the determination cannot be made on a motion to dismiss or for judgment on the pleadings. See Morris v. Bank of Amer., 2010 WL 761318, at *4 (N.D. Cal. March 3, 2010) (noting that while the TILA notice attached to the defendants' motion to dismiss may ultimately prove dispositive, the § 1635(c) presumption was inappropriate to apply at this early stage because it required an evaluation of the evidence); Glucksman v. First Franklin Fin. Corp., 601 F.Supp.2d 511, 514 (E.D.N.Y. 2009). At this stage, it is sufficient that the Updegraffs have pleaded that they did not receive the notices [Adv. Doc. 1, ¶¶ 31-33]. The issue of whether proper TILA disclosures were made is not a matter that can be decided solely from the pleadings nor does the existence of the Notice attached to Defendants' motion conclusively determine the issue.
For these reasons, the court excludes from consideration the Notice attached to Defendants' motion. It is extraneous evidence and, even if considered, not dispositive at this early stage in the litigation. The court further excludes the HSBC Affidavit attached to Defendants' motion as inappropriate evidentiary material outside the pleadings. Because Defendants' arguments for dismissing the First and Fourth Claims in the complaint rely on these extraneous evidentiary materials, their motion is denied with respect to these claims.
B. Second and Fifth Claims (Fraud and Negligent Misrepresentation): Applicability of the Economic Loss Rule
Next, the Defendants argue the applicability of Ohio's economic loss doctrine to bar the Updegraffs' Second and Fifth Claims for fraud and negligent misrepresentation, respectively. In Ohio, "[t]he economic-loss rule generally prevents recovery in tort of damages for purely economic loss." Corporex Dev. & Constr. Mgmt., Inc. v. Shook, Inc., 835 N.E.2d 701, 704 (Ohio 2005). This doctrine follows the well-established rule that "'a plaintiff who has suffered only economic loss due to another's negligence has not been injured in a manner which is legally cognizable or compensable.'" Id.(further citation omitted). Instead, recovery for economic loss is "strictly a subject for contract negotiation and assignment." Floor Craft Floor Covering, Inc. v. Parma Cmty. Gen. Hosp. Ass'n, 560 N.E.2d 206, 211-12 (Ohio 1990) (further noting that tort law is not designed to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement). See also Myvitanet.com v. Kowalski, 2008 WL 2977889, at *6 (S.D. Ohio July 29, 2008) (noting that negligence claims for purely economic loss are unavailable when the actionable conduct arises from a breach of a duty that would not exist but for the parties' contractual relationship). Defendants argue that the economic loss doctrine applies in this case to bar the claims for fraud and negligent misrepresentation because the Updegraffs' damages are purely monetary in nature.
While Defendants argue for a broad application of the economic loss doctrine, both state and federal courts have applied it more restrictively. Significantly, several Ohio appellate courts have concluded that the economic loss doctrine does not preclude a claim for negligent misrepresentation which, by its definition, allows damages for solely "pecuniary" or economic losses. See McCarthy, Lebit, Crystal & Haiman Co., L.P.A. v. First Union Mgmt, Inc., 622 N.E.2d 1093, 1105-06 (Ohio Ct. App. 1993) (noting that the Restatement's definition of negligent misrepresentation as adopted in Ohio provides a recovery for "pecuniary loss" caused by the supply of false information for the guidance of others). See also Universal Contracting Corp. v. Aug, 2004 WL 3015325, at *3 (Ohio Ct. App. Dec. 30, 2004); Ferro Corp. v. Blaw Knox Food & Chem. Equip. Co., 700 N.E.2d 94, 98 (Ohio Ct. App. 1997) (the existence of a contract does not preclude a fraud or negligent misrepresentation claim concerning actions of a party in negotiating a contract).
Although the Supreme Court of Ohio has not directly addressed the issue, the Sixth Circuit Court of Appeals and other federal courts interpreting Ohio law have followed the appellate "majority" view that the economic loss doctrine does not apply to a negligent misrepresentation claim. HDM Flugservice GMBH v. Parker Hannifin Corp., 332 F.3d 1025, 1032 (6th Cir. 2003) (citing the McCarthy opinion for the proposition that Ohio's economic loss rule does not apply to claims for negligent misrepresentation); ATM Exch., Inc. v. Visa Int'l Serv. Ass'n, 2008 WL 3843530, at *14 (S.D. Ohio Aug. 14, 2008) (Ohio's economic loss rule does not preclude plaintiff's claim of negligent misrepresentation); In re Nat'l Century Fin. Enter., Inc., 504 F.Supp.2d 287, 324 (S.D. Ohio 2007) (adopting the Sixth Circuit's reasoning that the economic loss rule does not apply to claims for negligent misrepresentation); Nat'l Mulch and Seed, Inc. v. Rexius Forest By-Products, Inc., 2007 WL 894833, at *7-9 (S.D. Ohio March 22, 2007) (thorough review of Ohio case law supporting conclusion that Ohio's economic loss rule does not bar a claim for negligent misrepresentation); DeNune v. Consol. Capital of North Amer., Inc., 288 F.Supp.2d 844, 855 (N.D. Ohio 2003) (no bar in Ohio law to a negligent misrepresentation claim that alleges fraud or negligence in the negotiation process leading to a contractual relationship).
While the Supreme Court of Ohio has not directly addressed the economic loss doctrine in conjunction with a negligent misrepresentation claim, the court has determined that, under certain foreseeable circumstances, an accountant may be liable for financial losses experienced by a third party who relies on the accountant's false or negligent representation. See Haddon View Inv. Co. v. Coopers & Lybrand, 436 N.E.2d 212, 215 (Ohio 1982). Some courts consider this an indirect endorsement of the view that the economic loss doctrine does not bar a negligent misrepresentation claim. See ATM Exch., Inc. v. Visa Int'l Serv. Ass'n, 2008 WL 3843530, at *14 (S.D. Ohio Aug. 14, 2008) ; Nat'l Mulch and Seed, Inc. v. Rexius Forest By-Products Inc., 2007 WL 894833, at *6 (S.D. Ohio March 22, 2007); Universal Contracting Corp. v. Aug, 2004 WL 3015325, at *3 (Ohio Ct. App. Dec. 30, 2004); McCarthy, Lebit, Crystal & Haiman Co., L.P.A. v. First Union Mgmt, Inc., 622 N.E.2d 1093, 1103-07 (Ohio Ct. App. 1993). But see Trustcorp Mort. Co. v. Zajac, 2006 WL 3690299, at *2-6 (Ohio Ct. App. Dec. 15, 2006) (declined to extend Haddon View to appraisers; the court concluded that the economic loss doctrine barred a third party mortgage lender's claim for negligent misrepresentation when the lender relied on a faulty appraisal report but was not in privity with the appraiser).
Similarly, federal courts interpreting Ohio law and at least one Ohio appellate court have concluded that the economic loss doctrine is not applicable to intentional torts like fraud or fraud in the inducement of a contract. Pride of the Hills Mfg., Inc. v. Range Res. - Appalachia, LLC, 2011 WL 2116455, at *7 (N.D. Ohio May 27, 2011); Hodell-Natco Indus., Inc. v. SAP Amer., Inc., 2010 WL 6765522, at *10 (N.D. Ohio Sept. 2, 2010); Reengineering Consultants, Ltd. v. EMC Corp., 2009 WL 113058, at *6 (S.D. Ohio Jan. 14, 2009); Marine Direct v. Doughtery Marine, Inc., 2007 WL 818412, at *2 (S.D. Ohio Jan. 8, 2007); Onyx Envtl. Serv., LLC v. Maison, 407 F.Supp.2d 874, 879 (N.D. Ohio 2005); Eysoldt v. Proscan Imaging, 957 N.E.2d 780, 785 (Ohio Ct. App. 2011). One reason cited is that the cause of action does not arise from a breach of the contract itself, but, instead, a breach of the general duty to avoid wrongful conduct that induces a party to enter the contract. Hodell-Natco, 2010 WL 6765522 at *10; Onyx, 407 F.Supp.2d at 879. Furthermore, this type of fraud almost always results in purely economic losses. Hodell-Natco, 2010 WL 6765522, at *10-11 (noting that applying the economic loss rule to fraud claims would "effectively eviscerate the viability of fraud and fraudulent inducement tort claims in Ohio").
The court is persuaded by the reasoning of these federal and state courts and their interpretation of Ohio law. The court concludes that Ohio's economic loss doctrine does not bar the Updegraffs from pursuing their claims for fraud and negligent misrepresentation against the Defendants. Consequently, the court denies the Defendants' motion for judgment on the pleadings with respect to the Second and Fifth Claims.
In footnote 3 within their Motion, the Defendants propose that the Updegraffs' negligent misrepresentation claim must be dismissed even if the economic loss doctrine does not apply because the Updegraffs cannot recover for both fraud and negligent misrepresentation with respect to the same course of action citing Textron Fin. Corp. v. Nationwide Mut. Ins. Co., 684 N.E.2d 1261, 1269 (Ohio Ct. App. 1996) for support. While Textron supports that a plaintiff cannot recover under two inconsistent theories of recovery, nothing in Textron prevents a plaintiff from pleading alternative or inconsistent claims in the complaint. See Denune, 288 F.Supp.2d at 855 (noting that pleading alternative but conflicting theories of recovery is not a basis for dismissal). Indeed, pleading such claims is specifically permitted by the Federal and Ohio Rules of Civil Procedure. See Fed. R. Civ. P. 8(d); Ohio R. Civ. P. 8(E).
C. Third Claim (Breach of Implied Covenant of Good Faith and Fair Dealing): Whether the Complaint States a Cause of Action / Applicability of the Statute of Frauds
Defendants' final argument focuses on the Updegraffs' claim for breach of the implied covenant of good faith and fair dealing. In the complaint, the Updegraffs assert that Beneficial agent John Bierly "told" the Updegraffs that if they entered a loan agreement at a higher interest rate than originally promised but made twelve consecutive payments under the terms of the written loan agreement, Beneficial would lower the interest rate [Adv. Doc. 1, ¶¶ 8, 71]. The duty of good faith and fair dealing was breached when Beneficial refused to honor this oral promise after the Updegraffs made their twelve timely payments at the 11.41% interest rate agreed to in the written contract [Id., ¶¶ 39-40, 72-73].
Defendants argue that this claim must fail because Ohio law does not recognize a cause of action for breach of the implied covenant of good faith and fair dealing that is separate from a breach of contract claim. Furthermore, Defendants argue that if the claim is allowed to stand as a breach of contract claim, it is barred by the applicable statute of frauds. The court agrees.
In Ohio, contracts, including loan agreements, have an implied duty for the parties to act in good faith and deal fairly with each other. Littlejohn v. Parrish, 839 N.E.2d 49, 54 (Ohio Ct. App. 2005). See also Krukrubo v. Fifth Third Bank, 2007 WL 4532689, at *4-5 (Ohio Ct. App. Dec. 27, 2007). This duty or covenant requires "not only honesty but also reasonableness in the enforcement of the contract." Littlejohn, 839 N.E.2d at 54. However, a claim for breach of the implied duty of good faith and fair dealing is not a separate tort but is, instead, part of a breach of contract claim. Krukrubo, 2007 WL 4532689, at *5; Roth v. Nat'l City Bank, 2010 WL 4884453, at *3 (Ohio Ct. App. Dec. 1, 2010) (noting that a separate tort claim does not exist except against insurance companies). Consequently, the claim cannot stand alone where no breach of contract has been alleged. Mortgage Elec. Registration Sys., Inc. v. Mosley, 2010 WL 2541245, at *11 (Ohio Ct. App. July 26, 2010); Krukrubo, 2007 WL 4532689, at *5; Dawson v. Blockbuster, Inc., 2006 WL 1061769, at *5 (Ohio Ct. App. March 16, 2006).
As Defendants correctly point out, the Updegraffs' complaint includes no allegations of a breach of contract. Nor, for that matter, do the Updegraffs argue that their claim for breach of the implied covenant of good faith and fair dealing should be construed as a breach of contract claim. As such, the claim cannot stand alone and should be dismissed. See Mosley, 2010 WL 2541245, at *11 (because plaintiffs did not argue that MERS or Bank One breached the contract, there is no viable claim for breach of the implied covenant of good faith and fair dealing); Krukrubo, 2007 WL 4532689 at *5 (a complaint which fails to state a claim for breach of contract also fails to state a claim for breach of the duty of good faith and fair dealing).
Even if the court were to construe the claim as one for breach of contract, that claim would be barred by the statute of frauds. The statute of frauds "is an evidentiary safeguard" that requires certain agreements to be in writing. Roth, 2010 WL 4884453, at *2. Relevant to this case is the statute of frauds found in Ohio Rev. Code § 1335.05 providing that:
No action shall be brought whereby to charge . . . a person . . . upon a contract or sale of lands, tenements, or hereditaments, or interest in or concerning them . . . unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person thereunto by him or her lawfully authorized.Ohio Rev. Code § 1335.05. According to the language of the statute, a claim for breach of an agreement concerning any interest in land "cannot be brought, as a matter of law, unless the agreement at issue was reduced to writing, signed by the party to be charged and produced." Fifth Third Bank v. Reddish, 2002 WL 31114911, at *4 (Ohio Ct. App. Sept. 25, 2002) (citing Michel v. Bush, 765 N.E.2d 911, 914 (Ohio Ct. App. 2001)).
In a similar case, an Ohio court of appeals declared this statute of frauds applicable to bar consideration of an oral agreement related to a residential mortgage loan. Reddish, 2002 WL 31114911, at *4. In Reddish, the borrowers and bank entered a written loan agreement secured by a mortgage on the borrowers' new home. Id. at *1. After the written agreement was entered, the borrowers allege that a bank representative orally promised that the bank would change the interest rate on the loan once the borrowers sold their former residence and applied the proceeds to the loan. Id. Following the borrowers' default on payments under the written agreement, the bank filed a complaint for judgment on the note and foreclosure. Id. at *1-2. The borrowers filed counterclaims asserting, among other things, that the bank breached the parties' oral agreement by refusing to change the interest rate. Id. at *2, 4. After determining that Ohio Rev. Code § 1335.05 was applicable to mortgage loan agreements and oral agreements relating thereto, the court of appeals determined that the borrowers' counterclaim was barred by the statute of frauds. Id. at *4. Because the borrowers did not produce a written agreement signed by the bank in which it promised to change the interest rate, the statute of frauds applied and the oral agreement could not be considered. Id.
Like Reddish, the Updegraffs allege an oral promise by Beneficial agent John Bierly to lower the interest rate on their mortgage loan after twelve consecutive monthly payments; there are no allegations that the promise was reduced to a written agreement signed by the bank [Adv. Doc. 1, ¶ 8]. Under Ohio Rev. Code § 1335.05, a breach of contract claim based on this oral promise is barred by the statute of frauds.
Alternatively, the Defendants argue the applicability of a separate more specific statute of frauds for "loan agreements" found in Ohio Rev. Code § 1335.02. This section states that "[n]o party to a loan agreement may bring an action on a loan agreement unless the agreement is in writing and is signed by the party against whom the action is brought." Ohio Rev. Code § 1335.02(B). The Defendants have some support for the applicability of this statute of frauds to mortgage loan agreements in the case of McCubbins v. BAC Home Loans Serv., L.P., 2012 WL 140218, at *3 (S.D. Ohio Jan. 18, 2012). However, excluded from this statute of frauds is "any loan agreement in which the proceeds of the loan . . . are used by the debtor primarily for personal, household, or family purposes and . . . [a] security interest securing the loan agreement is or will be acquired in the primary residence of the debtor." Ohio Rev. Code § 1335.02(D). At least facially, §1335.02(D) would appear to exclude a secured mortgage loan agreement like the one described in the Updegraffs' complaint where the proceeds are used to refinance a personal residence and purchase a vehicle. Unfortunately, neither the Defendants nor the Updegraffs discuss this exclusion and its applicability in their briefing. The court concludes that it need not determine the applicability of § 1335.02 nor the exclusion found in § 1335.02(D) given that the broader statute of frauds found in Ohio Rev. Code § 1335.05 bars the Updegraffs' claim for breach of the implied covenant of good faith and fair dealing.
Even if the statute of frauds is applicable, the Updegraffs argue that their claim can be removed from its operation by the doctrine of part performance. Ohio courts "have consistently recognized the doctrine of part performance as an exception to the statute of frauds." Beaverpark Assocs. v. Larry Stein Realty Co., 1995 WL 516469, at *3 (Ohio Ct. App. Aug. 30, 2005). For part performance to be sufficient to remove an oral agreement from the operation of the statute of frauds, the party that is relying on the agreement must have undertaken "unequivocal acts . . . which are exclusively referable to the agreement and which have changed his position to his detriment and make it impossible or impractical to place the parties in statu quo." Delfino v. Paul Davies Chevrolet, Inc., 209 N.E.2d 194, 195 (Ohio 1965); Beaverpark Assocs., 1995 WL 516469, at *3 (citing the Delfino case). In other words, for a party to establish part performance, the party must demonstrate that he has taken unequivocal actions in exclusive reliance on the oral agreement. Hubbard v. Dillingham, 2003 WL 1477698, at *4 (Ohio Ct. App. March 24, 2003); Beaverpark Assocs., 1995 WL 516469 at *3; Teicher Theaters, Inc. v. Thompson, 1983 WL 2530, at *2 (Ohio Ct. App. Oct. 28, 1983) (stating that "the acts of part performance must unmistakably point to the [oral] contract claimed, be consistent with it, and be such as would not have been done except for the contract"). See also Delfino, 209 N.E.2d at 198 (noting that if the "performance can reasonably be accounted for in any other manner or if the plaintiff has not altered his position in reliance on the oral agreement, the case remains within the operation of the statute").
In this case, the only alleged acts that the Updegraffs undertook in reliance on the oral agreement were a full year of timely monthly payments at the higher 11.41 % interest rate. However, these timely monthly payments at the 11.41 % interest rate were acts already required of the Updegraffs under the terms of the written loan agreement. The Updegraffs point to no further acts undertaken in exclusive reliance on the oral agreement. Because their actions were already accounted for under the terms of the written loan agreement and they allege no further acts in reliance on the oral representations made by Beneficial's agent, the Updegraffs' part performance argument must fail.
To support that their monthly payments should constitute part performance sufficient to remove the oral agreement from the statute of frauds, the Updegraffs cite the case of JP Morgan Chase Bank Nat'l Assn. v. O'Neil, 2011 WL 1408904 (Conn. Super. Ct. March 24, 2011). In O'Neil, a borrower alleged that a bank breached an oral agreement to modify a prior written loan agreement. Id., at *1. Under the terms of the oral agreement, the borrower was to make three monthly payments of $5,200 as a "trial plan" and submit certain documentation before a permanent HAMP loan modification could be entered. Id. However, after the borrower submitted the documentation and made six monthly payments of $5,200, the bank representative told the borrower that he was actually ineligible for the permanent loan modification. Id., at *2. In a motion to strike, the bank asserted that the borrower's breach of contract counterclaim was barred by the statute of frauds because the oral agreement to modify the loan was not reduced to writing. Id., at *3. The court denied the motion to strike concluding that the borrower's monthly payments of $5,200 might constitute part performance sufficient to take the oral agreement outside the statute of frauds. Id., at *4. Unfortunately, the O'Neil case has very limited value here. In addition to the fact that it interprets Connecticut rather than Ohio law, the case also fails to address whether the $5,200 payments made by the borrower were an exclusive requirement of the oral agreement or the same payment required under the prior written loan agreement. Under Ohio law, the payments would have to be an exclusive requirement of the oral agreement for the payments to constitute part performance which, unfortunately for the Updegraffs, is not supported by the facts presented in their complaint.
Finally, the Updegraffs argue that the statute of frauds should not be used to bar their fraud claims against Defendants. As support, they note that the purpose of the statute of frauds is to prevent rather than perpetuate fraud and, consequently, "courts will not permit the statute to be used as a shield to protect fraud." Gathagan v. Firestone Tire & Rubber Co., 490 N.E.2d 923, 924-25 (Ohio Ct. App. 1985); Beaverpark Assocs., 1995 WL 516469, at *4. While true, it is also true that the Defendants have not raised the statute of frauds as a defense against the Updegraffs' fraud claim in their motion. Instead, Defendants argue that the statute bars the Updegraffs' claim for breach of the implied covenant of good faith and fair dealing, a claim that sounds in contract, not tort. Because the statute of frauds is applicable to bar a claim for breach of the implied covenant of good faith and fair dealing based on an oral agreement like the one alleged in the Updegraffs' complaint, the Defendants' arguments with respect to the Third Claim are well taken. Judgment will be granted to Defendants on this claim.
CONCLUSION
For the foregoing reasons, the court grants the Defendants judgment on the pleadings with respect to the Third Claim in the Updegraffs' complaint for breach of the implied covenant of good faith and fair dealing. In all other respects, the Defendants' motion for judgment on the pleadings is denied.
SO ORDERED.
cc:
Charles J Roedersheimer
1340 Woodman Drive
Dayton, OH 45432
Email: tdbklaw@gmail.com
Reuel D Ash
Ulmer & Berne, LLP
600 Vine Street
Suite 2800
Cincinnati, OH 45402-2409
Email: rash@ulmer.com