ESCO Group, Inc. et al v. Mercantile Bank of Michigan et al

Filing 28

OPINION; Order and Judgment to issue; signed by Judge Janet T. Neff (Judge Janet T. Neff, clb)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

ESCO GROUP, INC. et al.,
Plaintiffs,

Case No. 1:10-cv-1159

v.

HON. JANET T. NEFF

MERCANTILE BANK OF MICHIGAN et al.,
Defendants.
____________________________________/

OPINION
Plaintiffs filed this multi-count action against Defendants Mercantile Bank of Michigan and
Mercantile Bank Mortgage Company, LLC, alleging that this Court possesses subject-matter
jurisdiction over the federal question presented in Count IV of their Verified Complaint and
supplemental jurisdiction over the remaining state-law claims. Now pending before the Court is
Defendants’ Motion to Dismiss (Dkt 22), to which Plaintiffs filed a response (Dkt 25), and
Defendants filed a reply (Dkt 26). Having fully considered the written briefs and accompanying
exhibits, the Court finds that the relevant facts and arguments are adequately presented in these
materials and that oral argument would not aid the decisional process. See W.D. Mich. LCivR
7.2(d). For the following reasons, the Court concludes that Defendants’ motion is properly granted.
I. BACKGROUND
These eleven Plaintiffs–Michigan corporations, companies, and their owners–allege that
Defendants, motivated by greed, “fraudulently induce[d] Plaintiffs to execute loan documents which
increase[d] Mercantile’s security interest received from Plaintiffs in an amount in excess of

$1,000,000.00” (Dkt 1, Verified Compl. ¶¶ 20, 21). Plaintiffs filed their Complaint in this Court on
November 23, 2010, alleging the following four counts:
I.

Promissory Estoppel

II.

Unlawful Interference with Business Opportunities

III.

Fraudulent Misrepresentation

IV.

Violation of Plaintiffs’ rights pursuant to the U.S. Conditution [sic]; 28 U.S.C.
§ 1391(b) and (c) and the Dodd-Frank Wall Street Reform and Consumer Protection
Act

Plaintiffs allege that Count IV gives rise to federal question jurisdiction in this Court (id. ¶ 4).
At the Pre-Motion Conference on Defendants’ proposed dispositive motion, counsel for
Plaintiffs withdrew their claims under 28 U.S.C. § 1391(b) and (c) (the federal venue statute) and
the Dodd-Frank Wall Street Reform Act, as alleged in Count IV of their Complaint (Order, Dkt 17).
The parties subsequently filed their motion papers, agreeing that only one claim in Count IV remains
that purports to state a federal question, to wit: an alleged violation of Plaintiffs’ due process rights
under the Fifth and Fourteenth Amendments to the United States Constitution (Defs. Mot. Br., Dkt
23 at 1; Pls. Resp. Br., Dkt 25 at 1-2).
II. ANALYSIS
Defendants move to dismiss Plaintiffs’ Count IV under FED. R. CIV. P. 12(b)(6) for failure
to state a claim and to dismiss Plaintiffs’ state-law claims in Counts I through III under Rule
12(b)(1) for lack of subject-matter jurisdiction. “Generally speaking, Rule 12(b)(6) permits a
defendant to seek relief on the ground that a cause of action fails as a matter of law, regardless of
whether the plaintiff’s factual allegations are true or not, while Rule 12(b)(1) permits a defendant

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to seek relief on the ground that the court has no subject-matter jurisdiction over the dispute.”
Winnett v. Caterpillar, Inc., 553 F.3d 1000, 1005 (6th Cir. 2009).
The Due Process Clause of the Fifth Amendment of the United States Constitution provides
that “[n]o person shall ... be deprived of life, liberty, or property without due process of law[.]” U.S.
Const. amend. V. The Fourteenth Amendment of the United States Constitution makes the Fifth
Amendment applicable to the States. See Hibben v. Smith, 191 U.S. 310, 325 (1903) (“The 14th
Amendment ... legitimately operates to extend to the citizens and residents of the states the same
protection against arbitrary state legislation affecting life, liberty, and property as is offered by the
5th Amendment....”).
As Defendants point out in their Motion to Dismiss, the restrictions in the Fifth Amendment
apply only to the federal government, not private actors (Defs. Mot Br., Dkt 23 at 2-3) (citing Public
Utils. Comm’n of Dist. of Col. v. Pollack, 343 U.S. 451, 461 (1952); Newsom v. Vanderbilt Univ.,
653 F.2d 1100, 1113 (6th Cir. 1981)). Further, as Defendants also point out, a plaintiff may not,
absent state action, assert a due process claim under the Fourteenth Amendment (id. at 3) (citing
Mays v. Buckeye Rural Elec. Co-op., Inc., 277 F.3d 873, 880 (6th Cir. 2002); Newsom, 653 F.2d at
1113). Plaintiffs do not dispute either of these rules of law.
Plaintiffs, who complain that Defendants “unlawfully confiscated Plaintiffs’ assets without
due process,” instead contend that Defendants “are private parties involved in government type
activities” (Dkt 1, Verified Compl. ¶ 41; Pls. Resp. Br., Dkt 25 at 2). “[A] private entity can be held
to constitutional standards when its actions so approximate state action that they may be fairly
attributed to the state.” Lansing v. City of Memphis, 202 F.3d 821, 828 (6th Cir. 2000). According
to Plaintiffs, this Court must decide whether Defendants’ “strong arm tactics constitute a sufficient

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government type nexus so as to give this Court jurisdiction” (Pls. Resp. Br., Dkt 25 at 1).
Defendants argue that Plaintiffs’ due process allegations fail to state a claim as a matter of law.
Defendants opine that “[a]bsolutely no nexus exists–nor has one been alleged–that would show a
sufficiently close nexus between the alleged action and a governmental body such that the activity
may be fairly treated as governmental activity” (Defs. Mot. Br., Dkt 23 at 4). Hence, the parties’
disagreement centers on whether Defendants’ actions were sufficiently involved with actions of the
state and federal governments such that the due process guarantees of the Fifth and Fourteenth
Amendments apply to their actions.
The fact that a business, such as a banking business, is subject to extensive and detailed
regulation does not alone render its actions governmental for purposes of the Fifth Amendment.
Fidelity Fin. Corp. v. Fed. Home Loan Bank of San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986)
(citing Jackson v. Metro. Edison Co., 419 U.S. 345, 350 (1974)). Similarly, “the mere fact that a
business is subject to state regulation does not by itself convert its action into that of the State for
purposes of the Fourteenth Amendment.” McCarthy v. Middle Tenn. Elec. Membership Corp., 466
F.3d 399, 411 (6th Cir. 2006) (quoting Jackson, 419 U.S. at 350).
“‘[T]he inquiry must be whether there is a sufficiently close nexus between the [government]
and the challenged action of the regulated entity so that the action of the latter may be fairly treated
as that of the [government] itself.’” Fidelity, 792 F.2d at 1435 (quoting Jackson, 419 U.S. at 351);
Northrip v. Fed. Nat. Mortg. Ass’n, 527 F.2d 23, 32 (6th Cir. 1975) (same). “This nexus may be
established by showing that the government exercised such coercive power or such significant
encouragement that it is responsible for the specific private conduct challenged, or by showing that

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the private entity has exercised powers that are traditionally the exclusive prerogative of the
government.” Id. (citing Blum v. Yaretsky, 457 U.S. 991, 1004-05 (1982)).
Acting according to private contract does not establish a governmental nexus. See, e.g., In
re Shirk, 437 B.R. 592, 604 (S.D. Ohio 2010) (holding that the borrowers failed to state a due
process claim against the bank that acquired their loans, either on account of its own conduct or
omissions or the conduct or omissions of its predecessor); In re Late Fee and Over-Limit Fee
Litigation, 528 F. Supp. 2d 953, 960 (N.D. Cal. 2007) (holding that “[t]he mere fact that federal
banking statutes allow the defendant banks and the plaintiffs to enter into private contracts allowing
for such fees does not transform the charging of those fees into state action”).
In their Verified Complaint, Plaintiffs allege that “Mercantile has used its position as a
lending banker to fraudulently induce Plaintiffs to execute loan documents which increase
Mercantile’s security interest...” (Dkt 1, Verified Compl. ¶ 20); that “Mercantile seeks to force the
Plaintiffs to execute further agreements and releases...” (id. ¶ 22); and that “Mercantile sold a
banking relationship to Plaintiffs” (id. ¶ 23). Plaintiffs’ allegations do not state a due process claim
under the United States Constitution. While Plaintiffs may have rights arising under the provisions
of the private security agreements they executed with Defendants, a point Defendants themselves
concede (Defs. Mot. Br., Dkt 23 at 4), Plaintiffs have not alleged that the government exercised such
coercive power or such significant encouragement that it is responsible for Defendants’ actions, nor
have Plaintiffs alleged that Defendants’ actions constitute the exercise of powers that are
traditionally the exclusive prerogative of the government. For these reasons, Plaintiffs’ Count IV
must be dismissed under Rule 12(b)(6) for “failure to state a claim upon which relief can be
granted.” See Musson Theatrical, Inc. v. Fed. Express Corp., 89 F.3d 1244, 1249 (6th Cir. 1996).

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When all claims vesting original jurisdiction are dismissed under Rule 12(b)(6), “there is a
strong presumption in favor of dismissing supplemental claims.” Musson Theatrical, Inc., 89 F.3d
at 1255. That presumption can only be overcome if the plaintiffs can show “unusual circumstances”
that create “some prejudice from relegating the case for trial in state court.” Id. Plaintiffs’
allegations that Defendants have “confiscated” their property do not overcome the presumption in
favor of dismissal. The Court declines to exercise supplemental jurisdiction over the state-law
claims in Counts I through III and therefore dismisses these counts without prejudice. See 28 U.S.C.
§ 1367(c)(3).
III. CONCLUSION
For the foregoing reasons, the Court grants Defendants’ Motion to Dismiss (Dkt 22). The
Court dismisses Plaintiffs’ due process claim in Count IV with prejudice and dismisses Plaintiffs’
state-law claims in Counts I through III without prejudice. Further, as the Court’s decision resolves
all pending claims, an Order and corresponding Judgment will be entered consistent with this
Opinion. See FED. R. CIV. P. 58.

DATED: January 10, 2012

/s/ Janet T. Neff
JANET T. NEFF
United States District Judge

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