Regent Bank v. Birch REA Partners Inc
Filing
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OPINION AND ORDER: For the reasons set forth in the Opinion and Order, the Court DENIES the Defendant's 14 Motion to Dismiss the Plaintiff's Complaint. Signed by Chief Judge Theresa L Springmann on 6/14/17. (jss)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
REGENT BANK,
Plaintiff,
v.
BIRCH REA PARTNERS, INC.,
Defendant.
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CAUSE NO.: 1:16-CV-262-TLS
OPINION AND ORDER
This matter is before the Court on the Defendant’s Motion to Dismiss the Plaintiff’s
Complaint [ECF No. 14], filed on September 2, 2016. On July 7, 2016, the Plaintiff, Regent
Bank, filed a Complaint [ECF No. 1] against the Defendant, Birch REA Partners, Inc. (Birch
REA). The Defendant subsequently moved to dismiss the Complaint, pursuant to Federal Rule of
Civil Procedure 12(b)(6), asserting that the Complaint fails to state a claim upon which relief
may be granted. On September 28, 2016, the Plaintiff filed its Response to the Defendant’s
Motion to Dismiss [ECF No. 19]. On October 5, 2016, the Defendant filed its Reply in Support
of its Motion to Dismiss [ECF No. 20]. With this matter now being fully briefed, the Defendant’s
Motion to Dismiss is denied for the reasons stated below.
COMPLAINT ALLEGATIONS
The Plaintiff is a Florida bank corporation that is the successor in interest to non-party PNC
Bank. (Compl. ¶¶ 1–2, ECF No. 1.) The Defendant is a Massachusetts corporation that served as
an appraiser in this case. (Id. ¶¶ 3, 6.) On May 16, 2007, non-party SunTrust Equity Funding,
LLC (SunTrust), on behalf of itself and PNC Bank, entered into a contract with the Defendant
for the purpose of appraising property to assist PNC Bank in establishing the value for a
mortgage of the property. (Id. ¶¶ 6–8.)
On August 17, 2007, the Defendant provided SunTrust and PNC Bank with the Appraisal
[ECF No. 1-1] that indicated the property’s market value. (Id. ¶ 6.) The cover of the Appraisal
states that it was “Prepared for: SunTrust & PNC” (Appraisal 3, ECF No. 1-1.)1 The cover letter,
appended to the Appraisal,2 states that “[t]his [enclosed] appraisal will reportedly be used to
assist SunTrust Bank and PNC Bank in establishing the value for mortgage collateral/asset
management purposes.” (Id. at 5.) The cover letter also states:
This confidential report is prepared for the use and benefit of SunTrust Bank and is
based, in part, upon documents, writings, and information owned and possessed by
SunTrust Bank. This report is provided for informational purposes only to third parties
authorized to receive it. The appraiser-client relationship is with SunTrust Bank as the
client. This report should not be used for any purpose other than to understand the
information available to the Bank concerning this property. SunTrust Bank assumes no
responsibility if this report is used in any other manner.
PNC Bank, National Association, its employees, agents, successors and assigns may
rely upon this report in evaluating a request for an extension of credit to be secured by
the property (the ‘Mortgage Loan’). This report may also be used and relied upon by
any actual or prospective purchaser, transferee, assignee, or servicer of the Mortgage
Loan (or any portion thereof), any actual or prospective investor (including agent or
advisor) in any securities evidencing a beneficial interest in or backed by the Mortgage
Loan (or any portion thereof), any rating agency actually or prospectively rating any
such securities, any indenture trustee, and any institutional provider(s) from time to time
of any liquidity facility or credit support for such financing. In addition, this report or a
reference to this report may be included or quoted in any offering circular, private
placement memorandum, registration statement or prospectus and Birch REA Partners,
Inc. agrees to cooperate in answering questions by any of the above parties in
connection with a securitization or transaction involving the Mortgage Loan (or any
portion thereof) and/or such securities. This report has no other purpose and should not
1
The Court will refer to particular page number per the ECF pagination and not the pagination of the
Appraisal.
2
The parties appear to dispute whether the letter appended to the Appraisal is a cover letter to the
Appraisal or the Appraisal itself. The Defendant quotes sections of this letter as “the Appraisal” (see, e.g.,
Def.’s Br. in Supp. of Mot. to Dismiss 5, ECF No. 15), while the Plaintiff calls the letter “the Birch cover
letter, which accompanies the Birch Appraisal,” (see, e.g., Pl.’s Resp. 8, ECF No. 19). For the purposes of
this Order, the Court will refer to the letter as the cover letter, appended to the Appraisal.
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be relied upon by any other person or entity.
(Id. at 5–6). Moreover, the letter states, “The value estimates and subsequent appraisal report are
intended for the information of SunTrust Bank (‘SunTrust’) and PNC Bank (‘PNC’).” (Id. at 6).
The Appraisal itself states that the Defendant “certif[ies] that, to the best of our knowledge and
beliefs: we have complied with SunTrust Bank and PNC Bank’s instructions, standards, and
specifications in conducting the research and analysis, and formulating the value conclusion.”
(Id. at 161.) Within a section captioned “Purpose & Function of Appraisal,” the Appraisal states:
“It is intended that this appraisal will serve as a guide to SunTrust Bank and PNC Bank with
respect to asset management/mortgage collateral purposes.” (Id. at 27.) Within a section
captioned “Description of Assignment,” the Appraisal states that it “is to serve as a guide to
SunTrust Bank and PNC Bank with respect to asset management/mortgage collateral purposes.”
(Id. at 113.)
On October 19, 2007, PNC Bank approved the loan, and on December 20, 2010, the
Plaintiff purchased the Mortgage Loan. (Compl. ¶¶ 11–12.) On February 19, 2016, after the
Plaintiff received a 2016 appraisal on the property, the Plaintiff determined that the Defendant’s
Appraisal overstated the value of the property because it concealed a prior sale of the property,
cherry-picked comparable properties to determine the property’s value when those other
properties were not similar to the property at issue, and disregarded market conditions of a
declining population and significant losses of manufacturing companies that support the market
in which the property is located, inter alia. (Id. ¶¶ 22–27.)
Consequently, on July 7, 2016, the Plaintiff filed a lawsuit against the Defendant alleging
four separate causes of action: First, the Plaintiff alleges that the Defendant acted negligently
because the “Defendant, as a professional appraiser, owed a duty of care” to the Plaintiff, the
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Defendant “breached that duty of care by providing a grossly inaccurate appraisal with inflated
values” and using methods that did not comply with the Uniform Standards of Professional
Appraisal Practice (“USPAP”) and Title XI of the Federal Financial Institutions Reform,
Recovery, and Enforcement Act (“FIRREA”), and therefore caused the Plaintiff damages. (Id. ¶¶
30–33.) Second, the Plaintiff alleges that the Defendant’s Appraisal constitutes a negligent
misrepresentation because the “Defendant failed to disclose material facts to the Plaintiff
regarding its improper appraisal methods” and “intended that PNC Bank (and its successors and
assigns) would rely upon and be induced by the misrepresentations to purchase the Mortgage
Loan.” (Id. ¶¶ 35–39.) Third, the Plaintiff alleges that the Defendant “knowingly and/or
recklessly engaged in . . . a course of business which operated as a fraud upon Regent Bank. . . .”
(Id. ¶ 41.) Finally, the Plaintiff alleges that the Defendant breached its contract with SunTrust
Bank and/or PNC Bank and, as PNC Bank’s successor in interest, the Plaintiff is a third party
beneficiary who suffered “foreseeable damages on the Mortgage Loan as a direct result of the
Defendant’s breach of the contract.” (Id. ¶¶ 50–54.)
STANDARD OF REVIEW
“A motion to dismiss pursuant to [Rule] 12(b)(6) challenges the viability of a complaint
by arguing that it fails to state a claim upon which relief may be granted.” Camasta v. Jos. A.
Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014). When reviewing a complaint attacked by
a Rule 12(b)(6) motion, the Court must accept all of the factual allegations as true and draw all
reasonable inferences in the light most favorable to the Plaintiff. Erickson v. Pardus, 551 U.S.
89, 93 (2007). The Complaint need not contain detailed facts, but surviving a Rule 12(b)(6)
motion “requires more than labels and conclusions . . . . Factual allegations must be enough to
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raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007). “A claim has facial plausibility when the pleaded factual content allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). Because the purpose of a
Motion to Dismiss “is to test the factual sufficiency of the statement of the claim for relief; the
motion is not a procedure for resolving a contest between the parties about the facts or the
substantive merits of the plaintiff’s case.” 5B Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 1356 (3d ed.).
The Court has jurisdiction over this case through diversity jurisdiction, 28 U.S.C. § 1332,
therefore it “must apply the law of the state as it believes the highest court of the state would
apply it if the issues were presently before that tribunal.” State Farm Mut. Auto. Ins. Co. v. Pate,
275 F.3d 666, 669 (7th Cir. 2001). Moreover, “[w]hen the state Supreme Court has not decided
the issue, the rulings of the state intermediate appellate courts must be accorded great weight,
unless there are persuasive indications that the state’s highest court would decide the case
differently.” Id. Here, both parties agree that Indiana law applies.
ANALYSIS
A
Professional Negligence and Breach of Contract - Third Party Beneficiary (Counts I
and IV)
Count IV of the Plaintiff’s Complaint seeks relief against the Defendant for breach of
contract, pursuant to the Plaintiff’s assertion that it was a third party beneficiary of the contract
between the Defendant and SunTrust. The Plaintiff must allege the following elements in order
to plead a third party beneficiary claim: (1) the intent to benefit the Plaintiff in the contract is
clear, (2) the contract imposes a duty on one of the contracting parties in favor of the Plaintiff,
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and (3) the performance of the terms necessarily renders to the third party a direct benefit
intended by the parties to the contract. Bowman v. Int’l Bus. Machs. Corp., 853 F. Supp. 2d 766,
769 (S.D. Ind. 2012) (citing Indiana law).
Count I of the Plaintiff’s Complaint seeks relief against the Defendant for professional
negligence. To demonstrate a claim of negligence under Indiana law, the Plaintiff must allege:
(1) a duty owed to him/her by the Defendant, (2) breach of that duty by the Defendant, and (3)
injury proximately caused by the Defendant’s breach of duty. DeSimone v. Noonan, No. 1:09CV-1421, 2012 WL 3027998, at *3 (S.D. Ind. July 24, 2012) (citing Kroger Co. v. Plonski, 930
N.E.2d 1, 6 (Ind. 2010)). Generally, whether a duty exists is a question of law for the Court to
decide, but, determining whether a duty exists is sometimes dependent upon underlying facts that
must be resolved by a trier of fact. BSA Const. LLC v. Johnson, 54 N.E.3d 1026, 1029 (Ind. Ct.
App. 2016) (citing Rhodes v. Wright, 805 N.E.2d 382, 386 (Ind. 2004)). In this case, the Plaintiff
rests its professional negligence claim in part on its contention that it was a third party
beneficiary to the Defendant’s contract with SunTrust. (See Pl.’s Resp. 8.) The status of a thirdparty beneficiary to a contract can serve as the basis of a duty in a negligence action, however,
“in Indiana, a professional owes no duty to one with whom he has no contractual relationship
unless the professional has actual knowledge that such third person will rely on his professional
opinion.” BSA Const. LLC, 54 N.E.3d at 1029 (citing Emmons v. Brown, 600 N.E.2d 133, 134–
35 (Ind. Ct. App. 1992)). Put another way, “a professional owes a duty of care only to his client
plus any third party who the professional knows will see and rely on any opinion he renders.” Id.
at 1030 (citing Decatur Ventures LLC v. Daniel, 485 F.3d 387, 390 (7th Cir. 2007)).
Here, the parties dispute whether the Defendant intended to benefit the Plaintiff and had
actual knowledge that the Plaintiff would rely upon the contract, with each party pointing to a
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different portion of the Appraisal and even disputing the scope of the contract at issue. The
Defendant argues that the Appraisal and the engagement letter, attached as an exhibit to the
Appraisal, expressly provide that the Appraisal is only for the “use and benefit of SunTrust.”
(Appraisal 5.) Furthermore, even though another part of the Appraisal states that a purchaser of
the mortgage loan may rely upon the Appraisal, the Defendant contends that Indiana law requires
that the Plaintiff must have been expressly identified as an intended beneficiary of the Appraisal
in order to establish third party beneficiary status. See DeSimone, 2012 WL 3027998, at *4; BSA
Const. LLC, 54 N.E.3d. at 1030, Emmons, 600 N.E.2d at 134. Because the Appraisal does not
explicitly name the Plaintiff as a beneficiary, the Defendant argues “Birch REA could not have
had actual knowledge [that Regent Bank would rely upon the Appraisal] as Regent Bank’s name
does not appear in the Appraisal.” (Mot. to Dismiss 6).
The Plaintiff contends that the relationship between the Defendant, SunTrust, and PNC
Bank, and itself, as PNC’s assign/successor, requires consideration not only of the engagement
letter, but also of the Appraisal and the cover letter appended to the Appraisal, both of which
include references to reliance by PNC’s successors and assignees. The Plaintiff argues, “The
crucial point here [is] that Birch clearly and expressly set forth that the Birch Appraisal was to
inure to and to be of benefit for PNC Bank, and its assigns/successors.” (Pl.’s Resp. 12.)
Furthermore, the Plaintiff points out that this case is distinct from the case law relied upon by the
Defendant because there are numerous references to benefit PNC Bank and its
assigns/successors, and the Defendant provided PNC Bank with a copy of the Appraisal knowing
that PNC Bank would review it and rely upon on it before making the decision to loan money.
As a result, the Plaintiff contends that the Defendant had the requisite actual knowledge to regard
the Plaintiff as a third party beneficiary.
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The Court finds that the parties’ arguments require resolution of factual questions as to
whether the Defendant intended to benefit the Plaintiff and had actual knowledge that the
Plaintiff would rely upon its Appraisal. These factual questions include the scope of the contract
between the Defendant, SunTrust, and PNC Bank, including whether the contract at issue is the
Appraisal, the cover letter appended to the Appraisal, and/or the engagement letter attached as an
exhibit to the Appraisal. Based on the briefing from the parties, it is unclear whether the parties
intended for the cover letter and engagement letter to be part of the Appraisal, or whether these
documents constitute extrinsic evidence informing ambiguities stemming from contradictions
contained within the Appraisal. See Universal Guar. Life Ins. Co. v. Coughlin, 481 F.3d 458, 464
(7th Cir. 2007) (“Contradictory language in a contract is classically ambiguous.”). Further, the
nature of the relationship between the Defendant, PNC Bank, and SunTrust, and the
circumstances upon which the parties contracted and/or negotiated for the Appraisal, may inform
the analysis of the parties’ intent to benefit the Plaintiff. Real Estate Support Servs., Inc. v.
Nauman, 644 N.E.2d 907, 911 (Ind. Ct. App. 1994) (holding that when determining whether a
party is a third party beneficiary, “The intention of the parties [to the contract] . . . is to be
determined in light of the surrounding circumstances which existed at the time the contract was
made.”). These are factual issues necessitating development through discovery.
Though the Defendant cites to DeSimone and Emmons, this case presents factual issues in
order to determine if DeSimone and Emmons are applicable—for instance, the Court in
DeSimone was able to conclude that “DeSimone lacks evidence of any actual knowledge”
because the parties at that point had already gone through the discovery process and elicited facts
concerning actual knowledge and the parties’ intentions. 2012 WL 3024998, at *4 (“It is
undisputed [from the Record] that Noonan and DeSimone had never spoken nor had any direct
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communication.”). A similar record has not yet been developed in the instant case. At this
motion to dismiss stage, the Court is not tasked with resolving factual inquiries. All the Court
must decide is whether there are enough facts to put the Defendant on reasonable notice as to the
nature of the Plaintiff’s claims and to allow the Court “to draw the reasonable inference that the
[D]efendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citation omitted). The
Court finds that the Plaintiff’s Complaint does just that. The Plaintiff has plead that the
Defendant and SunTrust contracted and intended for PNC Bank and its successors/assigns to be a
beneficiary of the Appraisal, the Defendant owed duties to PNC Bank as a result of that contract,
and the Defendant provided PNC Bank with a copy of the Appraisal while “fully aware” that
PNC Bank and its successors/assigns would review and rely upon the Appraisal before making
the decision to loan money. (Compl. ¶¶ 15–20.) In this manner, the Plaintiff has sufficiently
plead the requisite elements to claim third party beneficiary status.
Specifically in regard to the Plaintiff’s professional negligence claim, the Defendant
argues that whether a duty exists between itself and the Plaintiff is a question of law for this
Court to decide. However, as the Defendant also points out, for an appraiser to owe a duty to a
non-contracting party pursuant to Indiana law, it must be established that the non-contracting
party is a third party beneficiary of the contract, DeSimone, 2012 WL 3027998, at *4, and the
appraiser must know that a third person will rely upon its professional opinion, BSA Const. LLC,
54 N.E.2d at 1029. As this Court has explained, determining whether the Plaintiff is a third party
beneficiary requires analyzing factual questions concerning the scope of the contract and the
parties’ intent. Similarly, determining whether the Defendant had actual knowledge that PNC
and its successors/assigns would rely upon its Appraisal requires analyzing the relationship
and/or negotiation between the parties. Resolution of these issues may be more appropriate at the
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summary judgment stage, after development of a factual record, but is inappropriate for
resolution on this pending Motion to Dismiss.
B
Negligent Misrepresentation and Common Law/Constructive Fraud (Counts II and
III)
The Plaintiff seeks recovery in Counts II and III of its Complaint under the theories of
negligent misrepresentation and fraud. To state a claim for fraud, the Plaintiff must plead the
following elements: (1) a material misrepresentation of past or existing fact which (2) was
untrue, (3) was made with knowledge of or in reckless ignorance of its falsity, (4) was made with
intent to deceive, and (5) detrimental reliance by the complaining party. Rice v. Strunk, 670
N.E.2d 1280, 1284 (Ind. 1996). Indiana law holds a defendant liable for negligent
misrepresentation when: (1) the defendant, in the course of her business, profession, or
employment, or in any other transaction in which she has a pecuniary interest, supplies false
information for the guidance of others in their business transactions, (2) the defendant fails to
exercise reasonable care or competence in obtaining or communicating the information, (3) the
plaintiff justifiably relies upon the information supplied by the defendant, and (4) the plaintiff
suffers pecuniary loss as a result. U.S. Bank, N.A. v. Integrity Land Title Corp., 929 N.E.2d 742,
746 (Ind. 2010).
The Defendant argues that Indiana courts have held that subjective opinions, such as
valuations contained within an appraisal, cannot serve as a basis for an action in fraud. Similarly,
the Defendant argues that the same rationale applies to the Plaintiff’s claim of negligent
misrepresentation because, as an expression of opinion, an appraisal cannot be considered “false
information.” Additionally, the Defendant argues that Indiana law requires a party who sues
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pursuant to a theory of negligent representation to plead that the professional had actual
knowledge that the third party would rely upon the professional’s opinion.
The Plaintiff submits that the Defendant’s alleged fraud arises not from opinions
contained within the Appraisal, but from the Defendant’s omission of material facts, which are
not opinion-based. These facts include the failure to report that the property was sold previously
for a different price, the failure to disclose the economic downturn in the area surrounding the
property, and the misrepresentation that the sale was a market sale as opposed to a leaseback
sale. Therefore, the Plaintiff does not contest that expressions of opinion are inappropriate for
actions in fraud or negligence. Instead, the Plaintiff contends that its issues with the Defendant’s
Appraisal arise from misrepresentations and/or omission of information and not from
expressions of subjective opinion. The Defendant’s Reply argues that it was not required to
disclose the sale of the property pursuant to the USPAP, the Appraisal does contain an overview
of the regional economic decline, and the Appraisal expressly states it was a leaseback sale. In
this manner, the Defendant disputes the Plaintiff’s version of the facts.
Viewed in the light most favorable to the Plaintiff, the Plaintiff’s Complaint is
sufficiently clear in alleging the requisite elements for the claims of material misrepresentation
and fraud. The Plaintiff pleads that, “[Birch REA] refused to ascertain and disclose of such facts
concerning and regarding the Property . . . .” (Compl. ¶¶ 36, 42.) The Plaintiff further alleges that
the Defendant knew, or should have known, that its representations were false. (Id. ¶¶ 37, 42–
45.) Finally, the Plaintiff alleges that the Defendant intended for the Plaintiff to rely upon the
misrepresentations, and in fact, the Plaintiff did detrimentally rely upon them. (Id. ¶¶ 38–39. 48.)
Arguments by the parties concerning whether the Appraisal’s analysis of the economy and
mention of a leaseback sale are sufficient, and whether an appraiser is required to report a three-
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year old sale of a property, are factual disputes inappropriate for resolution in this Motion to
Dismiss. Accordingly, this Court holds that the Plaintiff’s allegations have put the Defendant on
reasonable notice as to the nature of the Plaintiff’s negligent misrepresentation and fraud claims
and allow the Court “to draw the reasonable inference that the [D]efendant is liable for the
misconduct alleged.” Iqbal, 556 U.S. at 678 (citation omitted).
CONCLUSION
Based on the foregoing, the Court DENIES the Defendant’s Motion to Dismiss [ECF No.
14] the Plaintiff’s Complaint.
SO ORDERED on June 14, 2017.
s/ Theresa L. Springmann
CHIEF JUDGE THERESA L. SPRINGMANN
UNITED STATES DISTRICT COURT
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