PORTLAND REGENCY INC et al v. RBS CITIZENS NA et al
Filing
107
ORDER ON DISCOVERY DISPUTE re 99 Objection to 96 Report of Hearing and Order Re: Discovery Disputes - By JUDGE D. BROCK HORNBY. (mnw)
UNITED STATES DISTRICT COURT
DISTRICT OF MAINE
PORTLAND REGENCY, INC., ET AL.,
PLAINTIFFS
V.
RBS CITIZENS, N.A., ET AL.,
DEFENDANTS
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CIVIL NO. 2:12-CV-408-DBH
ORDER ON DISCOVERY DISPUTE
This is a lawsuit about the proper calculation of prepayment and early
termination fees for interest rate swap agreements that the parties entered into
in connection with associated commercial loans. A large amount of money is at
stake. The plaintiff borrowers seek both declaratory judgment about how the
fees should be calculated on termination and damages for the defendant banks’
alleged negligent and intentional misrepresentation in providing (according to
the borrowers) false “indicative quotes” for termination fees.
On August 19,
2014, I heard argument on the banks’ objection to the Magistrate Judge’s ruling
that denied certain discovery to the banks on the grounds of untimeliness and
Fed. R. Civ. P. 26(b)(4)(D).
The focus of the discovery dispute is whether the banks can learn what
the borrowers’ non-testifying expert told the borrowers about her assessment of
the banks’ calculations. The banks argue that the information will counter the
borrowers’ assertions in their misrepresentation claim (Count Three) that they
have continued to rely on the banks’ calculations, assertions that extend beyond
the hiring of the expert, beyond the filing of the lawsuit, and even up to the
present. Objection to Order of Magistrate Judge at 9 (ECF No. 99).
It became apparent during the argument that, regardless, of how I rule on
the appeal from the Magistrate Judge’s decision, this issue (or one closely related
to it) will emerge at trial as well, because the banks will attempt to question the
borrowers’ principals and/or the expert on what the borrowers learned even if
they do not get the requested discovery. It also became apparent that there is
an important disagreement between the parties as to what the element of
justifiable reliance entails as part of the borrowers’ claim of misrepresentation.
The borrowers say that the banks misunderstand a core issue on their
misrepresentation claim. The borrowers say that even if they knew that the
calculations the banks gave them were wrong, they justifiably relied upon them
in not terminating the swaps and incurring termination fees because they
believed that the banks would continue to insist on the banks’ calculation
methods, which would cause the borrowers severe financial prejudice because
of the huge penalties. The borrowers liken it to a gun pointed at their heads that
the person holding the gun says is loaded, and argue that they are forced to
“rely” on the gun holder’s assertion.
The banks contend that what really
happened is that the borrowers did not terminate the swaps because they feared
that the banks were correct in their calculations and the borrowers were
unwilling to take the financial risk that they would have to pay all that the banks
said they would.
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The parties disagree over whether Maine or New York law applies. It seems
likely that the choice of law ultimately makes no difference. In Thompson v.
Cloud, 2014 WL 4092295, at *4 (1st Cir. Aug. 20, 2014), the First Circuit stated:
“Under Maine law both fraud and negligent misrepresentation require ‘justifiable
reliance’ on a misrepresentation.” The court quoted Barr v. Dyke, 49 A.3d 1280,
1287 (Me. 2012), which required in a fraud case that “[t]he other party justifiably
relied upon the representation as true and acted upon it to the party’s damage.”
Thompson, 2014 WL 4092295, at n.9 (emphasis added). Thompson also quoted
the Restatement (Second) of Torts on negligent misrepresentation as requiring
“justifiable reliance upon the information.” Thompson, 2014 WL 4092295 at
n.10 (quoting Restatement (Second) of Torts § 552(1)).1 The only New York case
the parties cite, Channel Master Corp. v. Aluminum Limited Sales, Inc., 151
N.E.2d 833 (N.Y. 1958), does not seem to differ from the Maine treatment.
The borrowers’ justifiable reliance assertion in Count Three is not the
conventional reliance element of a misrepresentation claim that I have described
above, at least as the reliance issue was presented to me at oral argument.2 The
Restatement (Second) of Torts § 552(1) states: “One who, in the course of his business,
profession or employment, or in any other transaction in which he has a pecuniary interest,
supplies false information for the guidance of others in their business transactions, is subject to
liability for pecuniary loss caused to them by their justifiable reliance upon the information, if
he fails to exercise reasonable care or competence in obtaining or communicating the
information.”
2 The borrowers’ lawyer answered my question about ability to recover if the borrowers knew the
estimates were fraudulent as follows: “Yes, because then we are relying on known false
statement. It’s still a false statement, but we’re relying on it because of the consequence of not
relying on it. So it’s a statement made―a false statement made on which we have relied, they
intended us to rely and we have relied and we are harmed.” He also told me: “whether or not
[the borrowers’ expert] confirms the bank’s representation is one that we are put in a position of
having to rely upon because of the consequence to us of taking an action that’s contrary to
accepting what the bank says.” Finally, he explained: “I mean if the bank says you’re going to
incur $5 million in early termination fees if you terminate this, even if they [the borrowers] don’t
believe that assertion, they’re put in the position where they have to come up with a solution for
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borrowers do assert great leverage by the banks but, if the borrowers knew or
had reason to know that the banks’ termination fee calculations were false, it is
difficult to understand how the borrowers could be relying on the truth of the
calculations, rather than on the threat of what the banks would demand if the
borrowers did terminate. In dealing with a negligent misrepresentation claim in
Devine v. Roche Biomedical Labs., Inc., 637 A.2d 441, 446 (Me. 1994), the Law
Court referred to the Restatement (Second) of Torts § 547 cmt. a (1977) for the
proposition that “whether a person relies on a fraudulent misrepresentation as
opposed to his own investigation is a question of fact.” It then went on to vacate
summary judgment on the basis that the person who asserted reliance in Devine
“testified that he would have reversed [his] decision” on the action to be taken if
he had known the statement made to him was inaccurate. Id.
In the end, I conclude that the better course is to delay ruling on the
discovery dispute3 and to reconvene the Local Rule 56 conference on the
proposed summary judgment motion. If the misrepresentation claim with its
claim of continuing reliance even after engagement of the expert survives
summary judgment, then I can proceed to the discovery ruling. If summary
how to deal with or put themselves at peril. They must, in fact, then not take other action or put
themselves in peril.” According to the Restatement (Second) of Torts, “The recipient of a
fraudulent misrepresentation is not justified in relying upon its truth if he knows that it is false
or its falsity is obvious to him.” Restatement (Second) of Torts § 541. “The maker of a fraudulent
misrepresentation is not liable to one who does not rely upon its truth but upon the expectation
that the maker will be held liable in damages for its falsity.” Id. § 548.
3 The Rule 26(b)(4)(D) issue is important and not free from doubt, and I am uncertain how it
interacts with the evidentiary ruling to be made at trial and other claims of privilege that the
plaintiffs say that they will raise then (they say that at trial they will not assert 26(b)(4)(D) as
preventing testimony, but instead attorney client privilege). I decline to rule solely on the basis
of timeliness because the issue may remain alive as an evidentiary issue at trial.
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judgment removes the misrepresentation claim after the expert’s engagement,
then the dispute becomes moot because the banks have said that without the
misrepresentation claim after the expert’s engagement they have no basis to
inquire into the expert/plaintiffs interchange.
Accordingly, the Clerk’s Office shall reschedule the Local Rule 56
conference that was suspended pending resolution of the discovery dispute.
SO ORDERED.
DATED THIS 2ND DAY OF SEPTEMBER, 2014
/S/D. BROCK HORNBY
D. BROCK HORNBY
UNITED STATES DISTRICT JUDGE
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