Edelman et al v. Belsheim & Bruckert, L.L.C. et al

Filing 47

ORDER granting in part and denying in part #35 Motion to Dismiss for Failure to State a Claim: For the reasons thoroughly explained in the attached Order, the Court GRANTS IN PART and DENIES IN PART Defendant's motion to dismiss Count 1 through 3 pursuant to Rule 12(b)(6). Counts 1 through 3 are dismissed without prejudice, and Plaintiffs are granted leave to amend the complaint one more time. Plaintiffs shall file their Third Amended Complaint by June 29, 2012. (Clerk's Office to set/adjust deadlines.) Signed by Judge Michael J. Reagan on 5/29/12. (soh )

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
STEVEN EDELMAN,
C. BRADFORD JEFFRIES, Trustee of
the C. Bradford Jeffries Living Trust, and
WILL FURMAN, Trustee of the FurmanDoane Family Revocable Trust,
Plaintiffs,
vs.
BELSHEIM & BRUCKERT, LLC, et al.,
Defendants.

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Case No. 11-cv-1121-MJR-PMF

MEMORANDUM AND ORDER
REAGAN, District Judge:
A.

Introduction
As explained in the Court’s May 21, 2012 Order herein (Doc. 46), this

lawsuit involves the financing for a multi-use real estate development called Forest
Lakes. In the January 26, 2012 Second Amended Complaint, Plaintiffs -- one individual
and two trusts, through their trustees -- asserted claims of negligent misrepresentation
and breach of fiduciary duty against a law firm, a title company, and an
insurer/underwriter. 1 More specifically, Plaintiffs collectively loaned three million dollars
to a non-party, Caseyville Sport Choice, LLC, in reliance on representations that the
loan was secured by a first lien mortgage on a parcel of real property.

1

The three Plaintiffs are (1) Steven Edelman, (2) C. Bradford Jeffries, as
Trustee of the C. Bradford Jeffries Living Trust dated September 19, 1994, and
(3) Will Furman, as Trustee of the Furman-Doane Family Revocable Trust. The
three named Defendants were (1) Belsheim & Bruckert, LLC (the law firm,
“Belsheim/Bruckert”), (2) Belco Title & Escrow, LLC (“Belco”), and (3) Attorneys’
Title Guaranty Fund, Inc. (“ATG”).

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Only later did Plaintiffs discover that their mortgage on the property was subordinate to
a $20,000,000 prior mortgage in favor of Meridian Bank. Meridian Bank foreclosed on
the property, and Plaintiffs lost their investment. They sue in this United States District
Court, seeking to recover their pecuniary losses plus interest, attorney’s fees, and costs.
The Second Amended Complaint (“complaint”) contained three negligent
misrepresentation claims against Belsheim/Bruckert (Counts 1-3), three breach of
fiduciary duty claims against Belco (Counts 4-6), and three breach of fiduciary duty
claims against ATG (Counts 7-9). Belco answered the complaint (Doc. 37). Defendant
ATG moved to dismiss the three claims against it, a motion which the Court granted on
May 21, 2012 (Doc. 46).
On March 12, 2012, Defendant Belsheim/Bruckert moved to dismiss
Counts 1, 2, and 3 (Doc. 35). Plaintiffs jointly opposed the motion on April 16, 2012
(Doc. 45), and the motion became ripe when the reply deadline (see Doc. 38) elapsed
on May 3, 2012, without a reply brief being filed. Enjoying subject matter jurisdiction via
the federal diversity statute, the Court now resolves Belsheim/Bruckert’s dismissal
motion.
B.

Applicable Legal Standards
Belsheim/Bruckert

seeks

dismissal

of

the

three

negligent

misrepresentation claims against it (Counts 1, 2, and 3) under Federal Rule of Civil
Procedure 12(b)(6). Analysis begins with standards governing Rule 12(b)(6) motions
and then focuses on the facts specific to the three counts in question.
In deciding a motion to dismiss for failure to state a claim on which relief
can be granted under Rule 12(b)(6), the district court’s task is to determine whether the
complaint includes “enough facts to state a claim to relief that is plausible on its face.”
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Khorrami v. Rolince, 539 F.3d 782, 788 (7th Cir. 2008), quoting Bell Atlantic Corp.
v. Twombly, 550 U.S. 544 (2007).
As the Court of Appeals for the Seventh Circuit has clarified: “Even after
Twombly, courts must still approach motions under Rule 12(b)(6) by ‘construing the
complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded
facts alleged, and drawing all possible inferences in her favor.’” Hecker v. Deere &
Co., 556 F.3d 575, 580 (7th Cir. 2009), cert. denied, 130 S. Ct. 1141 (2010), quoting
Tamayo v. Blagoyevich, 526 F.3d 1074, 1081 (7th Cir. 2008).
However, legal conclusions and conclusory allegations that merely recite
the elements of a claim are not entitled to the presumption of truth afforded to well-pled
facts. See, e.g., McCauley v. City of Chicago, 671 F.3d 611, 616 (7th Cir. 2011).
Therefore, after excising the allegations not accepted as true, the Court must decide
whether the remaining factual allegations plausibly suggest entitlement to relief. Id. In
other words, the complaint must contain allegations plausibly suggesting (not merely
consistent with) an entitlement to relief. Id., citing Twombly, 550 U.S. at 557. This
determination is a “context-specific task that requires the reviewing court to draw on its
judicial experience and common sense.” McCauley, 671 F.3d at 616, citing Ashcroft
v. Iqbal, 556 U.S. 662, 663-64 (2009).
A Rule 12(b)(6) dismissal motion “must be decided solely on the face of
the complaint and any attachments that accompanied its filing.” Miller v. Herman, 600
F.3d 726, 733 (7th Cir. 2010), citing FED. R. CIV. P. 10(c) and Segal v. Geisha NYC,
LLC, 517 F.3d 501, 504-05 (7th Cir. 2008).

Accord General Insurance Co. of

America v. Clark Mall Corp., 644 F.3d 375, 378 (7th Cir. 2011); FED. R. CIV. P. 12(d).

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Bearing

these

standards

in

mind,

the

undersigned

turns

to

Belsheim/Bruckert’s motion to dismiss.
C.

Analysis
→

THE ALLEGATIONS OF PLAINTIFFS’ COMPLAINT

Pertinent to Belsheim/Bruckert’s motion, the complaint alleges the
following.

Forest Lakes was developed through Caseyville Sport Choice, LLC

(Caseyville). John Nicholson and Glen Hierlmeier were co-managers of Caseyville. In
January 2007, Caseyville sent a letter and offering memorandum to Plaintiffs, seeking a
loan from Plaintiffs for Phase II of Forest Lakes. The letter and offering memorandum
stated that the loan would be secured by a first lien mortgage on the property. After
sending the letter and memo, Caseyville continued to represent to Plaintiffs that the loan
would be secured by a first lien mortgage.
In reliance on those written and oral representations, Plaintiff executed a
loan agreement by which they collectively loaned Caseyville $3,000,000. The Loan
Agreement expressly provided that the Loan was to be secured by a first lien mortgage
covering the property and any improvements. The Loan Agreement also provided that
Plaintiffs (as lenders) must receive all loan documents, including the note and
mortgage.
Belsheim/Bruckert (well aware that Plaintiffs expected their mortgage to
be a first lien mortgage) represented Caseyville in the transaction, reviewing the loan
agreement and drafting the mortgage with the “first lien” language. 2 Belsheim/Bruckert,

2

The complaint alleges:
“Upon information and belief, Belsheim
represented Caseyville in its development of Forest Lakes and the refinancing of
Phase II, including its negotiation and execution of the Loan Agreement with
Plaintiff, …, the negotiation and execute of the Mortgage required by the Loan

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during the course of its business and for its own pecuniary gain, provided information to
Plaintiffs that the mortgage was a first lien mortgage.

Belsheim failed to exercise

reasonable care in providing this information, which was intentionally provided for the
guidance of Plaintiffs.
Belco was the escrow agent on the loan transaction. In April 2007, ATG,
through Belco, issued a title commitment agreeing to issue a loan policy in favor of
Plaintiffs on the $3,000,000 loan. 3

The loan funds were disbursed to Caseyville.

Plaintiffs did not receive any of the loan or closing documents from Caseyville or
Belsheim/Bruckert, other than the mortgage.
The mortgage was recorded May 7, 2007. Two years later, Plaintiffs were
sued by Meridian Bank who claimed to have a prior mortgage on the same property. In
December 2009, Plaintiffs learned that their loan indeed was subordinate to the
Meridian Bank loan. Meridian Bank foreclosed on the property, and Plaintiffs lost their
entire investment.
→

BELSHEIM/BRUCKERT’S MOTION TO DISMISS

Belsheim/Bruckert moves to dismiss Counts 1 through 3 under Federal
Rule of Civil Procedure 12(b)(6), contending that these counts fail to state a claim upon
which relief can be granted. In the context of this motion, the Court accepts as true all
well-pleaded facts in the complaint and determines whether those allegations state a

Agreement to be provided in favor of Plaintiffs and the closing of the loan
transaction” (Complaint, Doc. 21, ¶ 25). The complaint also alleges on
information and belief that the letter and offering memorandum were given by
John Nicholson to Belsheim/Bruckert (complaint, Doc. 21, ¶ 16).
3

The title commitment plainly identified an earlier mortgage (dated June
15, 2005 and recorded June 16, 2005) executed by Caseyville and given to
Meridian Bank to secure a $20,000,000 note (Doc. 21, ¶ 27).

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claim to relief that is facially plausible. See Zemeckis v. Global Credit & Collection
Corp, -- F.3d --, 2012 WL 1650479, *1 (7th Cir. May 11, 2012); Santana, 2012 WL
1608601, *5. A claim survives Rule 12(b)(6) dismissal “when its factual allegations
‘raise a right to relief about the speculative level.’” Zemeckis at *1, quoting Twombly,
550 U.S. at 555-56.
Belsheim/Bruckert urges dismissal of the claims against it on two grounds:
(1) the economic loss doctrine bars Plaintiffs from seeking damages under a theory of
negligent misrepresentation herein, and (2) Plaintiffs cannot establish justifiable reliance
to support a negligent misrepresentation claim. The Court addresses these arguments
in turn.
Known as the Moorman doctrine in Illinois, the economic loss doctrine
“bars recovery in tort for purely economic losses arising out of a failure to perform
contractual obligations.” Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 567 (7th Cir.
2012), citing Moorman Manufacturing Co. v. Nat’l Tank Co., 435 N.E.2d 443, 448-49
(Ill. 1982).
In Moorman, the Illinois Supreme Court held that contract law protects
contracting parties’ expectations and provides the proper remedy, so a contracting party
may not recover for solely economic loss under tort theories of strict liability, negligence,
and innocent misrepresentation.

Catalan v. GMAC Mortg. Corp., 629 F.3d 676,

693 (7th Cir. 2011). So, for instance, the Moorman doctrine precludes liability for a
defendant that negligently hires or supervises an employee who, in the course of
performing a contract between a plaintiff and a defendant, causes the plaintiff to suffer
purely economic harm. Wigod, 673 F.3d at 567.

Likewise, if an architect bungles a

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construction design, the Moorman doctrine bars the aggrieved owner’s negligence
claim. “The shoddy workmanship is a breach of the design contract rather than a failure
to observe some independent duty of care owed to the world at large.” Id. at 568. 4
Illinois law recognizes several exceptions to the Moorman doctrine, each
of which is grounded in the general rule that where a duty arises outside of the contract,
the economic loss doctrine does not prohibit recovery in tort for a negligent breach of
that duty. Wigod, 673 F.3d at 567. “To determine whether the Moorman doctrine bars
tort claims, the key question is whether the defendant’s duty arose by operation of
contract or existed independent of the contract.” Id., citing Catalan, 629 F.3d at 693
(“These exceptions have in common the existence of an extra-contractual duty
between the parties, giving rise to a cause of action in tort separate from one
based on the contract itself.”).
The Illinois Supreme Court has summarized the three exceptions to the
doctrine as follows: (1) where the plaintiff sustained personal injury or property damage
resulting from a sudden or dangerous occurrence; (2) where the plaintiff's damages are
proximately caused by a defendant's intentional, false representation (i.e., fraud); and
(3)

where

the

plaintiff's

damages

are

proximately

caused

by

a

negligent

misrepresentation made by a defendant in the business of supplying information to
guide others in their business transactions. First Midwest Bank, N.A. v. Stewart Title
Guaranty Co., 843 N.E.2d 327, 333-34 (Ill. 2006).

4

A mortgage contract itself cannot create an extra-contractual duty without
some showing of a fiduciary relationship between the parties. Catalan, 529 F.3d
at 693.

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In the case at bar, Plaintiffs invoke the third exception – negligent
misrepresentation – to avoid application of the Moorman doctrine.

“The Illinois

Supreme Court allows suits alleging negligent misrepresentation ‘where [the defendant]
is in the business of supplying information for the guidance of others in their business
transactions.’” Kemper/Prime Indus. Partners v. Montgomery Watson Americas,
Inc., 487 F.3d 1061, 1063-64, citing Brogan v. Mitchell Int’l, 692 N.E.2d 276, 278 (Ill.
1998), and Moorman, 435 N.E.2d at 452.

To state a claim for negligent

misrepresentation under Illinois law, the plaintiff must allege: (a) a false statement of
material fact; (b) carelessness or negligence in ascertaining the truth of the statement
by the party making the statement; (c) an intention to induce the other party to act; (d)
action by the other party in reliance on the truth of the statement; (e) damage to the
other party resulting from such reliance; and (f) a duty on the party making the
statement to communicate accurate information.

Tricontinental Indus., Ltd. v.

PricewaterhouseCoopers, LLP, 475 F.3d 824, 833-34 (7th Cir. 2007), citing First
Midwest, 843 N.E.2d at 334-35. See also Kemper, 487 F.3d at 1064.
In the case sub judice, Belsheim/Bruckert acknowledges that negligent
misrepresentation constitutes an exception to the Moorman doctrine under Illinois law.
Belsheim/Bruckert maintains, however, that Plaintiffs’ negligent misrepresentation
claims against Belsheim/Bruckert must fail, because Belsheim/Bruckert represented
Caseyville (not Plaintiffs) in the loan transaction, and attorneys “do not become
guarantors for the performance of their clients’ contractual obligations simply because
they … draw up the papers containing those obligations” (Doc. 36, pp. 4-5).

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Plaintiffs respond that the negligent misrepresentation exception to the
Moorman doctrine is not confined to parties in privity. Plaintiffs point out that in Rozny
v. Marnul, 250 N.E.2d 656, 660 (Ill. 1969), the Illinois Supreme Court formally
abandoned the concept of privity of contract in actions for negligent misrepresentation
(Doc. 45, p. 10), and thus a defendant (like a lawyer) in the business of supplying
information may owe a duty to a plaintiff, even if the plaintiff is not the defendant’s own
client.
Plaintiffs have the better argument on this point, but it does not get them
all the way home. The Illinois courts have clearly held that “a defendant in the business
of supplying information may owe a duty to a plaintiff despite the fact that the plaintiff
was not the defendant’s client,” and “tort liability is to be measured ‘by the scope of the
duty owed rather than the artificial concepts of privity.’” Kelley v. Carbone, 837 N.E.2d
438, 441 (Ill. App. 2005). However, liability is limited to the persons for whose benefit
and guidance the information is intended. So, to plead a cause of action for negligent
misrepresentation against a provider of information employed by a third party, the
plaintiff must allege that the purpose and intent of the relationship was to benefit of
influence the plaintiff. Id., citing Pelham v. Griesheimer, 440 N.E.2d 96 (Ill. 1982),
and Brumley v. Touche, Ross & Co., 487 N.E.2d 641 (Ill. App. 1985).
Thus, the fact that Belsheim/Bruckert was retained by Caseyville rather
than Plaintiffs does not defeat Plaintiffs’ negligent misrepresentation claims. Lawyers,
as information and guidance providers, can be held liable to third parties. But the
complaint must allege that the lawyers were acting at the direction of, or on behalf of,
the client to benefit or influence the third party. Plaintiffs’ complaint does not allege that

9|Page

Belsheim/Bruckert was retained by Caseyville or acting at the direction of Caseyville to
benefit or influence Plaintiffs.
Yes, the complaint alleges that Belsheim/Bruckert drafted the mortgage
for Caseyville, but the allegations stop short of alleging a purpose or intent to benefit or
influence Plaintiffs.

Plaintiffs argue in response to the dismissal motion that the

mortgage “undoubtedly” was drafted to benefit or influence them in the loan transaction
(Doc. 45, p. 12), but the Court cannot assume that, and it is not necessarily a
reasonable

inference

from

the

well-pled

facts.

Some

allegation

about

Belsheim/Bruckert’s purpose or intent is needed to support the existence of a duty from
Belsheim/Bruckert to Plaintiffs in this information-provision context, and duty is essential
to any negligent misrepresentation claim Plaintiffs have against Belsheim/Bruckert.
See, e.g., Rojas Concrete, Inc. v. Flood Testing Laboratories, Inc., 941 N.E.2d 940,
943 (Ill. App. 2010)(“To state a claim for negligent misrepresentation, a plaintiff
must plead … that the defendant owed a duty to the plaintiff to communicate
accurate information.”); Board of Educ. vs. A, C, and S, Inc., 546 N.E.2d 580, 591
(Ill. 1989)(one of the elements of a negligent misrepresentation claims in Illinois is
“that the defendant owes a duty to the plaintiff to communicate accurate
information”).
So the negligent misrepresentation allegations come up just short.
However, the Court rejects Belsheim/Bruckert’s suggestion that the negligent
misrepresentation claims must be dismissed with prejudice at this time (Doc. 36, p. 5).
The Court will allow Plaintiffs an opportunity to replead Counts 1 through 3.

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As a second basis urged for dismissal of these counts, Belsheim/Bruckert
asserts that Plaintiffs have pled themselves out of court on Counts 1, 2, and 3 by
alleging facts which undermine this theory of liability. As noted above, Plaintiffs allege
that Belsheim/Bruckert repeatedly misrepresented to Plaintiffs that they were receiving
a first lien mortgage on the property, that Belsheim/Bruckert failed to exercise
reasonable care in providing information regarding the true nature of the mortgage, that
Plaintiffs justifiably relied on that information in investing in Phase II, and as a direct
cause of that reliance, suffered pecuniary loss.
Belsheim/Bruckert insists that dismissal is warranted because the earlier
Meridian Bank mortgage was recorded, 5 so Plaintiffs had constructive knowledge of a
substantial encumbrance having priority over Plaintiffs’ mortgage, and thus they could
not have justifiably relied on Belsheim/Bruckert’s representations.

“Plaintiffs cannot

claim that they justifiably and reasonably relied on Belsheim when they knew, as a
matter of law, that the property was already subject to a first lien mortgage” (Doc. 36, p.
6). Thus, argues Belsheim/Bruckert, Counts 1 through 3 should be dismissed with
prejudice.
This argument has first-blush appeal but on closer consideration leaves
the Court unpersuaded.

Defense counsel did not cite a case which lists justifiable

reliance as an element of a negligent misrepresentation claim, but the Court’s
independent research confirms justifiable reliance is needed. Defense counsel cite only
Prime Leasing, Inc. v. Kendig, 773 N.E.2d 84, 92 (Ill. App. 2002), for this proposition,

5

The complaint alleges that the title commitment issued in conjunction with
the closing identified the existence of the Meridian Bank mortgage “recorded
June 16, 2005” (Second Amended Complaint, Doc. 21, ¶ 27).

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but Prime Leasing recites the elements of an Illinois law negligent misrepresentation
claim in a way that does not mention justifiable reliance. Instead, the discussion of
justifiable reliance arises in the context of the plaintiffs’ fraud claim and is mentioned
briefly in connection with reference to Section 311 of the Restatement (Second) of Torts
(1965). Id.
Similarly, in Wigood, 673 F.3d at 569, the discussion of reasonable
reliance occurs in conjunction with the fraudulent misrepresentation claim.

And in

Tricontinental, 475 F.3d at 842, justifiable reliance is listed as an element of a private
cause of action for securities fraud under Rule 10b-5, not as an element of negligent
misrepresentation (“In order to state a claim for negligent misrepresentation under
Illinois law, a party must allege: (1) a false statement of material fact; (2) carelessness
or negligence in ascertaining the truth of the statement by the party making it; (3) an
intention to induce the other party to act; (4) action by the other party in reliance on the
truth of the statement; (5) damage to the other party resulting from such reliance; and
(6) a duty on the party making the statement to communicate accurate information.”).
But in Kopley Group V. L.P. v. Sheridan Edgewater Properties, Ltd.,
876 N.E2d 218, 228 (Ill. App. 2007), the Illinois Court of Appeals declared: “In any
event, in both negligent and fraudulent misrepresentation cases, the reliance by the
plaintiff

must

be

justified….”

See

also

Neptuno

Treuhand-Und

Verwaltungsgesellschaft Mbh v. Arbor, 692 N.E.2d 812, 818 (Ill. 1998)(“no
recovery for fraudulent misrepresentation, fraudulent concealment or negligent
misrepresentation is possible unless plaintiffs can prove justifiable reliance, i.e.,
that any reliance was reasonable.”) So, by alleging in paragraph 27 of the complaint

12 | P a g e

in the instant case that the Meridian Bank mortgage was recorded, have Plaintiffs
defeated their negligent misrepresentation claims? In the context of the motion before
the Court, accepting as true all well-pled facts and reasonable inferences therefrom
(and prohibited from looking outside the pleadings, as it could on a summary judgment
motion), the Court concludes not.
This is a close call, however, and it appears that Plaintiffs face an uphill
trek for these claims to survive further dispositive motions. Illinois caselaw holds that in
determining whether plaintiffs justifiably relied on a misrepresentation, “it is necessary to
consider all of the facts within a plaintiff’s actual knowledge as well as those that he
could have discovered by the exercise of ordinary prudence.” Kopley, 876 N.E.2d at
229, quoting Neptuno, 692 N.E.2d at 818.
Furthermore, a person “may not enter into a transaction with his eyes
closed to available information and then charge that he has been deceived by another;”
and if “ample opportunity existed to discover the truth, then reliance is not justified.” Id.
At this point, on the Rule 12(b)(6) motion currently before it, the Court is dismissing
Counts 1 through 3 without prejudice (on the grounds outlined above) and permitting
amendment of the complaint.
D.

Conclusion
The Court GRANTS in part and DENIES in part Belsheim/Bruckert’s

motion to dismiss Counts 1 through 3 for failure to state a claim upon which relief can
be granted (Doc. 35).

The motion is granted in that the Court will dismiss Counts 1

through 3, but the motion is denied in that the dismissal shall be without prejudice and

13 | P a g e

Plaintiffs shall be permitted one more amendment of their complaint. Plaintiffs shall file
their Third Amended Complaint by June 29, 2012.
IT IS SO ORDERED.
DATED May 29, 2012.
s/ Michael J. Reagan
Michael J. Reagan
United States District Judge

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