QA3 Financial Corp. et al v. Financial Network Investment Corporation et al
Filing
60
ORDER granting in part and denying in part 49 the defendants motion to dismiss. To the extent that Count IV alleges an unjust enrichment claim based on the theory that the plaintiffs were damaged by their decision not to pursue negotiations with other broker dealers, Count IV is dismissed for failure to state a claim upon which relief may be granted. In all other respects, the defendants motion to dismiss is denied. Ordered by Senior Judge Warren K. Urbom. (EJL)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
QA3 FINANCIAL CORP., QA3
FINANCIAL, LLC, QUANTUM
INSURANCE DESIGN, LLC, and
QA3, LLC,
)
)
)
)
)
Plaintiffs,
)
)
v.
)
)
FINANCIAL NETWORK
)
INVESTMENT CORPORATION,
)
CETERA FINANCIAL GROUP, and )
MULTI-FINANCIAL SECURITIES )
CORPORATION,
)
)
Defendants.
)
8:12CV5
MEMORANDUM AND ORDER ON
DEFENDANTS’ MOTION TO
DISMISS THE AMENDED
COMPLAINT
On November 5, 2012, QA3 Financial Corp., QA3 Financial, LLC, Quantum
Insurance Design, LLC, and QA3, LLC (collectively, “QA3" or “the plaintiffs”) filed
a four-count amended complaint against Financial Network Investment Corporation
(FNIC), Cetera Financial Group, and Multi-Financial Securities Corporation
(collectively, “the defendants”). Now before me is the defendants’ motion to dismiss
Counts I-III and part of Count IV pursuant to Federal Rule of Civil Procedure
12(b)(6). (ECF No. 49.) For the following reasons, the defendants’ motion will be
granted in part.
I.
BACKGROUND
The third amended complaint alleges as follows. QA3 Financial Corp. is an
1
Iowa Corporation with its principal place of business in Omaha, Nebraska. (Am.
Compl. ¶ 2.) Prior to February 11, 2011, it was a registered broker-dealer with the
Securities and Exchange Commission (SEC) and the Financial Investment Regulatory
Association (FINRA), and it provided broker-dealer services to approximately 450
registered investment representatives on an independent contractor basis. (Id.) On
February 11, 2011, it filed an action in the United States Bankruptcy Court for the
District of Nebraska seeking reorganization under the bankruptcy laws. (Id.)
QA3 Financial, LLC is a Nebraska limited liability company with its principal
place of business in Omaha, Nebraska. (Id. ¶ 3.) It was a registered investment
advisor regulated by the SEC. (Id.) On June 14, 2011, it filed a petition in the United
States Bankruptcy Court for the District of Nebraska seeking reorganization under the
bankruptcy laws. (Id.)
Quantum Insurance Design, LLC is a Nebraska limited liability company with
its principal place of business in Omaha, Nebraska. (Id. ¶ 4.) Its primary business
was to market insurance products such as fixed income annuities. (Id.)
QA3, LLC is a Nebraska limited liability company with its principal place of
business in Omaha, Nebraska. (Id. ¶ 5.) Its members are Stephen K. Wild and Teri
Sue Shepherd, both of whom are Nebraska citizens. (Id.) It is the sole member of
QA3 Financial, LLC and Quantum Insurance Design, LLC, and it is the sole owner
of QA3 Financial Corp. (Id.) On March 11, 2011, QA3, LLC filed a petition in the
United States Bankruptcy Court for the District of Nebraska seeking reorganization
under the bankruptcy laws. (Id.)
FNIC is a foreign corporation with its principal place of business in El
Segundo, California. (Id. ¶ 7.) At relevant times, it was a broker-dealer consisting
of a network of 30 regions across the United States that includes over 2,400 financial
2
professionals. (Id.)
Multi-Financial Securities Corporation (MFSC) is a foreign corporation with
its principal place of business in Denver, Colorado. (Id. ¶ 9.) It serves as an
entrepreneurial financial services firm. (Id.)
Cetera Financial Group (Cetera) is a foreign corporation with its principal place
of business in El Segundo, California. (Id. ¶ 8.) It sponsors three distinct brokerdealer platforms, including the defendants FNIC and MFSC, and it provides
“comprehensive broker-dealer services, innovative technology, and competitive
advisory programs for approximately 5,000 independent financial professionals and
more than 700 financial institutions nationwide.” (Id.)
Sometime after September 2008, many FINRA arbitration claims were filed
against QA3 Financial Corp. due to its sale of “alternative investments sponsored by
issuers that either filed for bankruptcy or were placed in receivership by the SEC.”
(Id. ¶ 13. See also id. ¶ 15.) Catlin Specialty Insurance Company (Catlin), which was
the issuer of QA3 Financial Corp.’s professional services errors and omissions
insurance policy in 2009, advised QA3 Financial Corp. “that all coverage for the
securities arbitrations involving alternative investments would be capped at $1
million despite the fact that the aggregate policy limits on the endorsement page listed
$7.5 million in coverage.” (Id. ¶ 15.) Because its defense costs alone would exceed
the $1 million limit, QA3 Financial Corp. entered into global settlement discussions
with most of the claimants in the arbitrations and pursued negotiations with third
parties in an attempt “to increase the net capital of QA3 Financial Corp. and to repay
[debt] incurred by QA3, LLC.” (Id. ¶ 16. See also id. ¶ 14 (alleging that defense
costs would reduce the amount of insurance coverage available for indemnification).)
These efforts brought QA3 Financial Corp. into contact with FNIC.
3
On July 19, 2010, FNIC’s investment banker contacted QA3 Financial Corp.
“to arrange an introduction between Stephen K. Wild and Heather Jansen of QA3 and
Mr. Handy, President and CEO of FNIC.” (Id. ¶ 17.) QA3 then began discussions
with Handy “about a potential business relationship between QA3 and FNIC.” (Id.)
On September 24, 2010, FNIC’s investment banker made its first due diligence
request on behalf of FNIC, and QA3 representatives made arrangements to travel to
FNIC’s office in October 2010. (Id. ¶ 18.) On October 28, 2010, FNIC and QA3
Financial Corp. signed a “Mutual Confidentiality and Non-Disclosure Agreement.”
(Id. ¶ 19.) In doing so, the parties “understood the need to keep the negotiations
confidential because any disclosure of the proposed affiliation would cause a mass
solicitation of QA3 investment representatives and advisors by other broker dealers
in the industry.” (Id.)
On November 7, 2010, Handy and Valerie Brown, CEO of Cetera, “traveled
to Omaha, Nebraska to discuss a possible business relationship.” (Id. ¶ 20.) It was
proposed that FNIC would become “the registered broker-dealer for QA3 Financial
Corp. investment representatives and QA3 Financial, LLC investment advisors who
agreed to transfer their affiliations to FNIC.” (Id. ¶ 21.) “The contemplated transfer
of representatives and advisors” would take place before February 1, 2011, to avoid
“a potential net violation problem” that could arise if a pending arbitration case
resulted in an adverse award.
(Id.)
“As a critical element of the proposed
relationship, FNIC agreed to provide necessary capital” to QA3. (Id.) “In exchange,
QA3 would work with its investment representatives and advisors on transferring
their client base and association to FNIC.” (Id.) The parties envisioned that QA3
Financial Corp. would continue as a broker-dealer due to the ongoing securities
arbitrations, but it “would wind down its operations as expeditiously as possible.”
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(Id.) Also, the parties “contemplated the formation of a new FNIC regional Office
of Supervisory Jurisdiction (OSJ),” which would be managed by “a core group of
QA3’s management” with financial support from FNIC. (Id. ¶ 22.)
In early November 2010, Royal Alliance Associates, Inc. (Royal Alliance) was
also interested in becoming the broker-dealer for QA3 Financial Corp. investment
representatives. (Id. ¶ 23.) QA3 informed Handy and FNIC “that time was of the
essence and if FNIC was not serious about completing a deal, FNIC should tell QA3
it was not interested.” (Id.) In an email dated November 29, 2010, Handy “proposed”
the following payments: $1 million to QA3, LLC; $1.25 million to the new Regional
OSJ, amortized over seven years; $1.5 million in transition costs; $3 million to the
new Regional OSJ in the form of bonuses; and $2 million in loans to investment
representatives amortized over four years, for a total of $8,750,000. (Id. ¶ 24.) Under
this “proposed relationship[,] approximately 65-70% of the QA3 Financial Corp.
representatives and QA3 Financial, LLC investment advisors would be transferred
to the new FNIC Regional OSJ, and the promised capital would allow QA3 Financial
Corp. and QA3 Financial, LLC to deal with the pending arbitrations and provide
service to the representatives and advisors who did not transfer to FNIC because of
the pending arbitrations.” (Id. ¶ 25.) Handy’s email of November 29, 2010, “induced
QA3 to discontinue discussions with Royal Alliance and not to contact other
prospective buyers.” (Id.)
On December 8, 2010, Handy, Wild, Jansen, and legal representatives from
FNIC and QA3 participated in a telephone conference to discuss “details surrounding
the implementation of the proposal made by Mr. Handy” in the email of November
29, 2010. (Id. ¶ 26.) The participants discussed the arbitrations pending against QA3
Financial Corp. and the status of settlement talks, and FNIC’s lawyers expressed
5
concern about successor liability. (Id.) After the conference, QA3’s lawyers gave
FNIC’s lawyers citations to cases that provided guidelines for structuring the
transaction to avoid successor liability. (Id. ¶ 27.)
On December 13, 2010, Handy “specifically reiterated” that “FNIC would be
providing upfront money to QA3 under the proposed relationship.” (Id. ¶ 28.) Later
that month, Handy “suddenly reduced the amount of the payment to QA3 to $2.5
million, but [he] continued to work with QA3 to meet the proposed schedule to have
the representatives and advisors transferred to FNIC.” (Id. ¶ 29.)
On January 14, 2011, QA3 received notice of an interim award in a California
arbitration which, if not satisfied, would create a net capital violation on February 14,
2011. (Id. ¶ 30.) QA3 then met with FINRA representatives to discuss the
anticipated net capital violation. (Id. ¶ 31.) During this meeting, QA3 informed
FINRA of “the proposed business relationship” with a broker-dealer without naming
FNIC. (Id. ¶ 32.)
On January 20, 2011, Handy “promised a draft agreement and the payment of
$2.5 million to QA3.” (Id. ¶ 33.) Then on January 26, Handy “gave QA3 permission
to disclose FNIC’s identity to FINRA, and FINRA requested a telephone conference
be scheduled.” (Id. ¶ 34.) During this telephone conference, “FNIC’s lawyers falsely
told FINRA that the lawyers had only recently been brought into the deal and left the
impression that QA3 and FNIC were not close to reaching an agreement.” (Id. ¶ 35.)
Also, FNIC described the payment to QA3 as contingent on the “actual transfer of the
QA3 Financial Corp. representatives.” (Id. ¶ 37.) This was contrary to the previous
discussions between QA3 and FNIC. (Id.) After the telephone conference, Jansen
“expressed outrage to Mr. Handy that FNIC’s lawyers had just created the impression
that QA3 had been misrepresenting the status of the proposed transaction to FINRA
6
during other meetings.” (Id. ¶ 36.) Handy replied “that the lawyers were merely
being careful because regulators were on the conference call.” (Id.)
On January 28, 2011, Handy informed QA3 that “there was now a problem
paying any money in advance,” but he “believed the payment of $2.5 million could
be made upon the transfer of the investment representatives from QA3 Financial
Corp. to FNIC.” (Id. ¶ 38.)
FNIC held a board meeting on or about February 3, 2011. (Id. ¶ 39.) It appears
that sometime after this meeting, Handy informed QA3 that “FNIC still wanted to
move forward, but the contract must be changed and provide for payment of a $1.5
million ‘introductory fee’ as if the fee were paid to a third party broker.” (Id.) Handy
“also explained that he was not able to offer employment to anyone in QA3
management.” (Id.) In addition, Handy said “that one of his associates had gone
through all of QA3’s records and prepared a chart broken out by product for each
QA3 Financial Corp. investment representative, and he contemplated an
announcement going out to QA3 Financial Corp. representatives as soon as possible.”
(Id. ¶ 40.) “QA3 reluctantly accepted the watered down proposal because it was too
late to explore other options.” (Id. ¶ 41.)
On or about February 4, 2011, FNIC’s lawyers circulated a draft agreement,
and Handy indicated for the first time “that the payment of the $1.5 million
‘introductory fee’ could only be paid to QA3 Financial Corp., and could not be paid
to QA3, LLC to be used to pay indebtedness as expressly referenced in prior
discussions.” (Id. ¶ 42.) QA3 representatives responded that the payment “had to be
paid at the holding company level in order to pay indebtedness,” but Handy replied
that “the payment could only be made in the manner [stated in the] proposed
contract.” (Id. ¶ 43.)
7
On February 5, 2011, Handy left a voice message telling Wild “that he should
be concerned about his legacy” and requesting that QA3 release FNIC from the
October 28, 2010, confidentiality and non-disclosure agreement “to allow QA3
Financial Corp. investment representatives to transfer to FNIC,” even though QA3
and FNIC failed to reach an agreement. (Id. ¶ 44.)
Because FNIC failed to “pay upfront money to alleviate QA3 Financial Corp.’s
net capital problems and to pay indebtedness at the holding company level . . . QA3
Financial Corp. faced a net capital violation on February 14, 2011.” (Id. ¶ 45.) “QA3
Financial Corp filed a Chapter 11 bankruptcy petition on February 11, 2011, and
deregistered as a broker-dealer.” (Id. ¶ 46.)
“On February 28, 2011, Cetera announced that 35 financial advisors formerly
affiliated with QA3 Financial Corp. joined its family of independent broker-dealers.”
(Id. ¶ 47.) “Fifteen QA3 Financial Corp. representatives joined Defendant MFSC .
. . , and the balance joined FNIC’s BAR Financial Region.” (Id.) QA3 alleges that
Cetera, FNIC, and MFSC “recruited the financial advisors in violation of the Mutual
Confidentiality and Non-Disclosure Agreement.” (Id. ¶ 48.)
As noted above, the amended complaint includes four counts. In Count I,
which is titled “Fraudulent Misrepresentation,” QA3 alleges that on November 29,
2011, FNIC falsely represented through Handy that it would pay $2.5 million to QA3
“up front.” (Id. ¶¶ 50-51.) It alleges further that “FNIC knew that the representation
was false or recklessly made the representation without knowledge of its truth and as
a positive assertion,” that FNIC intended for QA3 to “rely on the representation and
forgo seeking other business options,” and that QA3 suffered damages because it “did
in fact rely on FNIC’s representations.” (Id. ¶¶ 51-53.)
In Count II, which is titled “Fraudulent Concealment,” QA3 alleges that from
8
November 29, 2010, to January 26, 2011, “FNIC knew that QA3 was relying on the
fact the proposed relationship contemplated that upfront money would be paid, but
[it] failed to disclose to QA3 that FNIC would not pay any money until the transfer
of the investment representatives had been completed.” (Id. ¶ 55.) It adds that FNIC
had a duty to disclose that it would not pay upfront money to QA3; that QA3 could
not have known through diligent attention, observation, and judgment that FNIC had
no intention to pay upfront money; that FNIC’s concealment was intended to induce
QA3 to refrain from pursuing a relationship with another broker-dealer; and that due
to FNIC’s concealment, QA3 did not pursue negotiations with other broker-dealers.
(See id. ¶¶ 56-60.)
Count III, titled “Negligent Misrepresentation,” states that FNIC “supplied or
furnished false information to QA3 for QA3’s guidance in its business transactions”;
that “FNIC failed to exercise reasonable care or competence in communicating the
information”; that “QA3 reasonably relied on the false information supplied by
FNIC”; and that QA3 suffered damages as a result of FNIC’s negligent
misrepresentations. (Id. ¶¶ 62-65.)
In Count IV, which is titled “Breach of Contract and Unlawful Enrichment,”
QA3 alleges that “[i]n recruiting QA3 Financial Corp. financial representatives and
QA3 Financial, LLC investment advisors, Defendants breached the terms of the
Mutual Confidentiality and Non-Disclosure Agreement by using the confidential
information provided to FNIC.” (Id. ¶ 67.) It also alleges that as a “result of
Defendants’ actions, Defendants Cetera, MESC [sic] and FNIC have received or will
receive monies to which they are not entitled and for which it [sic] should be required
to disgorge.” (Id. ¶ 68.) Finally, QA3 alleges, “In reasonable reliance on the false
information, QA3 did not pursue negotiations with other broker dealers and was
9
damaged as alleged.” (Id. ¶ 69.)
The defendants have moved to dismiss Counts I-III in their entirety, adding that
Count IV must be dismissed to the extent that it incorporates Counts I-III. (See
generally Mot. to Dismiss, ECF No. 49.)
II.
STANDARD OF REVIEW
“Federal Rule of Civil Procedure 8 requires that a complaint present ‘a short
and plain statement of the claim showing that the pleader is entitled to relief.’”
Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009). To survive a
motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 570 (2007)). “A pleading that offers ‘labels and conclusions’ or ‘a
formulaic recitation of the elements of a cause of action will not do.’” Id. (quoting
Twombly, 550 U.S. at 555). “Nor does a complaint suffice if it tenders ‘naked
assertion[s]’ devoid of ‘further factual enhancement.’” Id. (quoting Twombly, 550
U.S. at 557). Also, although a court must accept as true all factual allegations when
analyzing a Rule 12(b)(6) motion, it is not bound to accept as true legal conclusions
that have been framed as factual allegations. See id. (“[T]he tenet that a court must
accept as true all of the allegations contained in a complaint is inapplicable to legal
conclusions.”). See also Cook v. ACS State & Local Solutions, Inc., 663 F.3d 989,
992 (8th Cir. 2011).
“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, 556 U.S. at 678 (citation omitted). “The plausibility
10
standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer
possibility that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S.
at 556). “Where a complaint pleads facts that are ‘merely consistent with’ a
defendant’s liability, it ‘stops short of the line between possibility and plausibility of
entitlement to relief.’” Id. (quoting Twombly, 550 U.S. at 557) (internal quotation
marks omitted). In other words, “where the well-pleaded facts do not permit the court
to infer more than the mere possibility of misconduct, the complaint has alleged–but
it has not ‘shown’–‘that the pleader is entitled to relief.’” Id. at 679 (quoting Fed. R.
Civ. P. 8(a)(2)) (brackets omitted).
III.
ANALYSIS
The defendants argue that Counts I, II, and III must be dismissed in their
entirety for three reasons: a) the plaintiffs have failed to allege facts establishing the
elements of promissory fraud; b) the parties’ negotiations failed to yield a final
contract, and there was no “pre-contractual obligation to negotiate in good faith”; and
c) the plaintiffs failed to plead “reasonable reliance.” (See Defs.’ Br. at 4-10, ECF
No. 50.) The defendants also argue that Count IV must be dismissed insofar as it
“blur[s] the distinction” between unjust enrichment and the claims stated in Counts
I-III. (See id. at 10-11.) I shall consider each of the defendants’ arguments in turn.
A.
Promissory Fraud
The defendants argue first that Counts I, II, and III must each be dismissed
because all three counts are based on “promissory fraud,” and the plaintiffs have
failed to allege the elements of promissory fraud. (See Defs.’ Br. at 4-7, ECF No. 50.)
The defendants define “promissory fraud” as “a promise to do something in the
future, which, at the time the promise is made, the speaker has no intention of actually
11
doing.” (Defs.’ Br. at 4, ECF No. 50.) I agree with the defendants that fraud claims
of this nature are recognized under Nebraska law. See Alliance National Bank &
Trust Co. v. State Surety Co., 390 N.W.2d 487, 493 (Neb. 1986) (“A promise, made
by a promisor who has the intent not to perform such promise when made, may
constitute fraud.”). I also agree with the defendants that the amended complaint does
not contain factual allegations sufficient to state a claim of promissory fraud. More
specifically, I agree that the amended complaint does not allege the existence of a
“promise,” but merely a series of proposals made by the defendants during the course
of negotiations that ultimately failed. (Cf. Mem. & Order (Smith Camp, C.J.) at 1013, ECF No. 26 (holding that the plaintiffs’ original complaint, which was based on
the same facts, failed to state a promissory estoppel claim because the plaintiffs failed
to allege that the defendants made a promise).) In addition, I doubt whether the
amended complaint alleges facts showing plausibly that the defendants made
proposals without any intent to reach an agreement. The amended complaint does
allege that the defendants altered their positions during the course of negotiations and
that no agreement was reached, but Nebraska law suggests that allegations of mere
“nonperformance” are insufficient. Cf. Leichner v. First Trust Co. of Lincoln, 274
N.W. 475, 478 (Neb. 1937) (indicating that evidence of circumstances “other than
that of nonperformance” of an agreement is needed to support an inference of
fraudulent intent). In short, the defendants have persuaded me that the amended
complaint fails to state a claim of promissory fraud upon which relief may be granted.
The defendants have not persuaded me, however, that Counts I, II, and III are
not viable unless the plaintiffs can establish promissory fraud.
As noted above, Count I is based on the theory of fraudulent misrepresentation.
“To state a claim for fraudulent misrepresentation, a plaintiff must allege (1) that a
12
representation was made; (2) that the representation was false; (3) that when made,
the representation was known to be false or made recklessly without knowledge of
its truth and as a positive assertion; (4) that the representation was made with the
intention that the plaintiff should rely on it; (5) that the plaintiff did so rely on it; and
(6) that the plaintiff suffered damage as a result.” Knights of Columbus Council 3152
v. KFS BD, Inc., 791 N.W.2d 317, 331 (Neb. 2010) (footnote and citation omitted)
(emphasis added). “To constitute a false representation, a statement must be made
as a statement of fact, not merely the expression of an opinion.” Kliewer v. Wall
Construction Co., 429 N.W.2d 373, 380 (Neb. 1988) (citations omitted). Moreover,
fraud generally “cannot be based on predictions or expressions of mere possibilities
in reference to future events.” Outlook Windows Partnership v. York International
Corp., 112 F. Supp. 2d 877, 894 (D. Neb. 2000) (citing NECO v. Larry Price &
Associates, 597 N.W.2d 602, 606 (Neb. 1999)). The instant case implicates this rule
because the plaintiffs allege that the defendants misrepresented their intent to pay
“upfront money” to QA3 at some point in the future. (See Am. Compl. ¶¶ 49-53, ECF
No. 43.) The rule is not without exceptions, however. Most significantly for present
purposes, “fraud may be predicated on the representation that an event, which is in
control of the maker, will or will not take place in the future, if the representation as
to the future event is known to be false when made or is made in reckless disregard
as to its truthfulness or falsity and the other elements of fraud are present.” NECO,
597 N.W.2d at 606-607 (citations omitted).1 The NECO exception is similar to
1
In Outlook Windows Partnership, the court discussed a second
“recognized exception” to the general rule that applies when the alleged
misrepresentation is a matter of the maker’s opinion. See 112 F. Supp. 2d at 894.
Neither party suggests that this exception applies in the instant case.
13
element (3), highlighted above, with the additional requirement that the future event
“is in control of the maker.” According to the defendants, the NECO exception also
corresponds to a claim of promissory fraud. (Defs.’ Br. at 4, ECF No. 50.) I disagree.
As stated previously, a viable promissory fraud claim requires allegations of
“a promise to do something in the future, which, at the time the promise was made,
the speaker has no intention of actually doing.” (Defs.’ Br. at 4, ECF No. 50.) In
contrast, neither element (3) of a fraudulent misrepresentation claim nor the NECO
exception depend on the existence of a promise, agreement, commitment, or contract;
rather, a plaintiff need only allege a “representation.” See Zawaideh v. Nebraska
Department of Health and Human Services Regulation and Licensure, 825 N.W.2d
204, 212-13 (Neb. 2013) (noting that “none of the elements” of fraudulent
misrepresentation or negligent misrepresentation “require an underlying contract,”
that “the true legal dispute for a misrepresentation cause of action is the tortious
actions of the defendant,” and that “fraud and deceit provide a ground for recovery
that is independent of contract”). Furthermore, although fraudulent misrepresentation
claims (and the NECO exception) can proceed based upon allegations that the
representations were known to be false when made, they may also proceed based
upon allegations that the representation was “made recklessly without knowledge of
its truth.” Id.; see also Knights of Columbus Council 3152, 791 N.W.2d at 331;
NECO, 597 N.W.2d at 606-607. The defendants have not argued that the plaintiffs
have failed to allege a “representation,” nor have they argued that the plaintiffs have
failed to allege that a representation was “made recklessly without knowledge of its
truth.” Instead, they merely argue (and I agree) that the narrower elements of
promissory fraud have not been properly alleged. It does not follow, however, that
because the amended complaint fails to state a promissory fraud claim, it necessarily
14
fails to state a fraudulent misrepresentation claim under the NECO exception.
In short, it seems to me that the elements of fraudulent misrepresentation and
the NECO exception are broader than the elements of promissory fraud; therefore, I
am not convinced that the plaintiffs’ failure to allege a viable promissory fraud claim
is necessarily fatal to their fraudulent misrepresentation claim.
The defendants’ attempt to re-frame Count II as a promissory fraud claim is
also unpersuasive. “[T]o prove fraudulent concealment, a plaintiff must prove these
elements: (1) The defendant had a duty to disclose a material fact; (2) the defendant,
with knowledge of the material fact, concealed the fact; (3) the material fact was not
within the plaintiff’s reasonably diligent attention, observation, and judgment; (4) the
defendant concealed the fact with the intention that the plaintiff act or refrain from
acting in response to the concealment or suppression; (5) the plaintiff, reasonably
relying on the fact or facts as the plaintiff believed them to be as the result of the
concealment, acted or withheld action; and (6) the plaintiff was damaged by the
plaintiff’s action or inaction in response to the concealment.” Knights of Columbus
Council 3152, 791 N.W.2d at 331. The elements of promissory fraud (i.e., (1) a
promise that (2) the speaker had no intention of keeping at the time it was made) do
not appear among the elements of fraudulent concealment, and the defendants have
not otherwise shown that the plaintiffs’ fraudulent concealment claim can only
proceed under a promissory fraud theory.2 Under the circumstances, I cannot
2
The defendants argue that the plaintiffs’ fraudulent concealment claim can
only proceed as a promissory fraud claim because “fraud cannot be based on
predictions or expressions of mere possibilities in reference to future events”
unless the NECO exception is satisfied, and the NECO exception corresponds to a
claim of promissory fraud. (See Def.’s Br. at 4, ECF No. 50 (quoting Pawnee Co.
Bank v. Droge, 226 Neb. 314, 324 (1987)).) As I explained in the preceding
15
conclude that the plaintiffs’ failure to allege promissory fraud requires the dismissal
of Count II.
Nor am I persuaded that Count III must be dismissed due to the plaintiffs’
failure to state a claim of promissory fraud. The Nebraska Supreme Court endorses
the definition of negligent misrepresentation appearing in section 552 of the
Restatement (Second) of Torts. That section 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.” Knights of Columbus
Council 3152 v. KFS BD, Inc., 791 N.W.2d 317, 330 (Neb. 2010) (quoting
Restatement (2d) of Torts § 552). “Negligent misrepresentation has essentially the
same elements of fraudulent misrepresentation with the exception of the defendant’s
mental state.” Zawaideh v. Nebraska Department of Health and Human Services
Regulation and Licensure, 825 N.W.2d 204, 212 (Neb. 2013).
The defendants theorize that the plaintiffs’ negligent misrepresentation claim
must be dismissed because “statements that . . . relate to future events are not
actionable as a matter of law” unless the NECO exception is satisfied; the NECO
exception corresponds to a claim of promissory fraud; and the plaintiffs have not
alleged facts sufficient to establish a plausible claim of promissory fraud. (See Def.’s
Br. at 4, ECF No. 50.) As I noted previously, I agree with the defendants that the
plaintiffs’ fraud claim “cannot be based on predictions or expressions of mere
paragraphs, however, the NECO exception is broader than promissory fraud, and
the defendants’ argument overlooks the disparities between the two.
16
possibilities in reference to future events” unless the NECO exception is satisfied.
The defendants’ argument that the plaintiffs’ negligent misrepresentation claim also
cannot proceed unless the NECO exception is satisfied stands on less-sure footing.
None of the authorities cited by the defendant expressly holds that the NECO
exception and the “general rule” it circumvents apply to negligent misrepresentation
claims. (See Defs.’ Br. at 4, ECF No. 50 (citing Kliewer v. Wall Construction Co.,
429 N.W.2d 373, 380 (Neb. 1988) (“To constitute a false representation [for the
purposes of a negligent misrepresentation claim], a statement must be made as a
statement of fact, not merely the expression of opinion.”); Leichner v. First Trust Co.
of Lincoln, 274 N.W. 475, 478 (Neb. 1937) (discussing fraud (as opposed to
negligent misrepresentation)); Pawnee Co. Bank v. Droge, 226 Neb. 314, 324, 411
N.W.2d 324, 330 (1987) (same); NECO v. Larry Price & Associates, 597 N.W.2d
602, 606 (Neb. 1999) (explaining that “[g]enerally, fraud cannot be based on
expressions of mere possibilities in reference to future events,” but “fraud may be
predicated on the representation that an event, which is in control of the maker, will
or will not take place in the future, if the representation as to the future event is
known to be false when made or is made in reckless disregard as to its truthfulness
or falsity and the other elements of fraud are present”); 1 Neb. Practice Series NJI2d
Civ. 9.01).)3 That aside, even if I assume that negligent misrepresentation claims
3
I note in passing that the NECO exception requires a showing that “the
representation as to the future event is known to be false when made or is made in
reckless disregard as to its truthfulness or falsity,” 597 N.W.2d at 606, which is in
tension with the principle that negligent misrepresentation does not require
allegations that the defendant knew that his statement was false, see Lucky 7, LLC
v. THT Realty, LLC, 775 N.W.2d 671, 675 (Neb. 2009) (“[T]he defendant’s
carelessness or negligence in ascertaining the statement’s truth will suffice for
negligent misrepresentation.”). In other words, imposing the NECO exception’s
17
based on representations about future events must satisfy the NECO exception to
remain viable, I have already concluded that the plaintiffs’ failure to state a
promissory fraud claim does not necessarily mean that the plaintiffs have failed to
state a claim that falls within the NECO exception.
In summary, I am not persuaded that “Counts I-III can only be actionable as
promissory fraud,” and therefore I shall not dismiss Counts I-III for the reason that
the plaintiffs “cannot plead the promise or intent elements” of promissory fraud.
(Defs.’ Br. at 7, ECF No. 50.)
B.
Whether Relief Is Unavailable Due to the Lack of a Final Agreement or
an Obligation to Negotiate in Good Faith
The defendants argue,
Where negotiations concerning a commercial transaction break
down, typical issues are (i) whether the negotiations were nonetheless
final enough to form a contract to sell or purchase the thing in question,
and (ii) whether there was a breach of any pre-contractual obligation to
negotiate in good faith. If the answer to both questions is “no,” courts
have refused to use fraud theories to grant any relief.
The same analysis applies here.
(Defs.’ Br. at 7-8, ECF No. 50 (citations omitted).) None of the authorities cited by
the defendants in support of this argument is controlling, and they offer little support
for their position.
In PFT Roberson, Inc. v. Volvo Trucks North America, Inc., 420 F.3d 728 (7th
Cir. 2005), an operator of a fleet of trucks sued its supplier for breach of contract and
fraud. Only the breach of contract theory was submitted to the jury, which found in
favor of the operator. Id. at 729. The supplier appealed the district court’s denial of
requirements on a negligent misrepresentation claim would seem to convert the
claim into one based on fraudulent misrepresentation.
18
its motion for judgment as a matter of law, and the operator cross-appealed the district
court’s refusal to submit its fraud theory to the jury. The Seventh Circuit reversed,
holding that “no contract had been reached,” and the “dispute should have been
resolved in [the supplier’s] favor on summary judgment.” Id. at 732, 733. On the
issue of fraud, the court merely stated, “That conclusion [(i.e., that there was no
contract)] makes it unnecessary to address [the operator’s] argument that [the
supplier] committed ‘fraud’ by proposing new or changed terms after December 6.”
Id. at 733 (citation omitted). In support of this point, the court cites Feldman v.
Allegheney International, Inc., 850 F.2d 1217, 1223 (7th Cir. 1988), for the
proposition that “self-interested negotiation does not show bad faith or fraudulent
negotiation.” See PFT Roberson, Inc., 420 F.3d at 733. Feldman, however, involved
a plaintiff’s breach of contract claim against a party to failed negotiations, and the
court merely rejected the plaintiff’s theory that by signing a letter of intent, the other
party to the negotiations “acquired a duty to negotiate in good faith.” 850 F.2d at
1223. Neither case holds that claims of fraudulent misrepresentation, fraudulent
concealment, or negligent misrepresentation can never proceed in the absence of a
binding contract. Nor do these cases hold that an agreement to negotiate in good faith
is a prerequisite to any of the aforementioned claims.
Similarly, in Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 264 (2d Cir.
1984), which is also cited by the defendants, the Second Circuit rejected the
plaintiffs’ theory that the defendants breached a duty to negotiate in good faith
because “whatever implied agreement to negotiate in good faith” that existed “was
too indefinite to be enforceable under New York law.”4 The case simply does not
4
The court also affirmed the district court’s dismissal of the plaintiffs’
securities fraud claim, which was based on § 10(b) of the Securities and Exchange
19
support the defendant’s theory that fraudulent misrepresentation, fraudulent
concealment, and negligent misrepresentation claims cannot proceed in the absence
of a binding contract or an agreement to negotiate in good faith.
Moreover, as I noted previously, the idea that fraudulent misrepresentation and
negligent misrepresentation claims cannot proceed in the absence of a binding
contract has been squarely rejected by the Nebraska Supreme Court. See Zawaideh
v. Nebraska Department of Health and Human Services Regulation and Licensure,
825 N.W.2d 204, 212 (Neb. 2013) (“The important thing to note is that none of the
elements [of fraudulent or negligent misrepresentation] require an underlying
contract.”). I see no indication that the court would apply a different rule to
fraudulent concealment claims.
The defendants also refer me to Cimino v. FirsTier Bank, N.A., 530 N.W.2d
606, 616 (Neb. 1995), which holds that “in order for the implied covenant of good
faith and fair dealing to apply, there must be in existence a legally enforceable
contractual agreement,” and to Precision Industries, Inc. v. Tyson Foods, Inc. , No.
8:09cv195, 2009 WL 4377558, at *1 (D. Neb. Nov. 25, 2009), wherein the court
dismissed a plaintiff’s claim “that the defendant breached the contract by failing to
negotiate a contract extension in good faith.” (See Defs.’ Br. at 8, ECF No. 50.)
These cases are inapposite to the plaintiffs’ tort claims.
Finaly, the defendants emphasize that the plaintiffs’ claim for promissory
estoppel has already been dismissed, and they suggest that Counts I-III should also
be dismissed because “there is no factual, legal, or logical basis for a different result.”
Act of 1934, 15 U.S.C. § 78j(b) (1982), partly because the defendant “did not enter
into a contract.” 727 F.2d at 265. Because the plaintiffs in the instant case have
not raised a securities fraud claim, this portion of the court’s holding is inapposite.
20
(Defs.’ Br. at 8, ECF No. 50.) The promissory estoppel claims included in the
original complaint were dismissed because the plaintiffs failed to allege that the
defendants made a promise, (see Mem. & Order (Smith Camp, C.J.) at 10-13, ECF
No. 26), but as I explained above in Part III.A., the defendants have not persuaded me
that the existence of a promise is a necessary component of the plaintiffs’ fraudulent
misrepresentation, fraudulent concealment, or negligent misrepresentation claims.
Thus, there is a clear “basis for a different result.”
In short, the defendants have not shown that Counts I-III must be dismissed due
to the absence of a contract, a promise, or an agreement to negotiate in good faith.
C.
Reasonable Reliance
Next, the defendants argue that Counts I-III must be dismissed because this
court has already concluded that the plaintiffs have failed to satisfy the element of
“reasonable reliance.” (See Defs.’ Br. at 8-10, ECF No. 50.)
I agree that “reasonable reliance” is an essential element of fraudulent
misrepresentation, fraudulent concealment, and negligent misrepresentation. See
Knights of Columbus Council 3152 v. KFS BD, Inc., 791 N.W.2d 317, 334 (Neb.
2010) (noting that fraudulent concealment requires proof that “the plaintiff,
reasonably relying on the fact or facts as the plaintiff believed them to be as the result
of the concealment, acted or withheld action”); Lucky 7, LLC v. THT Realty, LLC,
775 N.W.2d 671, 675-76 (Neb. 2009) (“So whether the plaintiff was justified in
relying upon representations made by the defendant requires the same inquiry
whether it is a fraudulent or negligent misrepresentation claim.” (footnote omitted)).
However, I disagree with the defendants’ argument that this court’s prior ruling
establishes that the plaintiffs cannot show reasonable reliance.
The plaintiffs’ original complaint was based upon the same facts that are
21
alleged in the amended complaint, but it included a promissory estoppel claim (as
opposed to misrepresentation and concealment claims). (See Compl. ¶¶ 49-55, ECF
No. 1.) In a memorandum and order dated May 3, 2012, Chief Judge Laurie Smith
Camp dismissed the plaintiffs’ promissory estoppel claim with prejudice. (See Mem.
& Order (Smith Camp, C.J.) at 10-13, ECF No. 26.) In support of her decision, she
noted first that “to succeed on a promissory estoppel claim, a plaintiff must show ‘that
the promisor made a promise,’ and that the plaintiff’s ‘reliance on the promise [was]
reasonable and foreseeable.’” (Id. at 10 (quoting 168th and Dodge, LP v. Rave
Reviews Cinemas, LLC, 501 F.3d 945, 955 (8th Cir. 2007)) (internal quotation marks
omitted).) She then explained that the plaintiffs failed to state a promissory estoppel
claim upon which relief may be granted because “[i]t cannot be inferred from the
Complaint that FNIC made a ‘promise’ to the Plaintiffs upon which the Plaintiffs
could reasonably rely.” (Id. at 13.) In other words, the plaintiffs’ promissory
estoppel claim was dismissed because the plaintiffs failed to allege facts showing
plausibly that a promise was made to the plaintiffs. Contrary to the defendants’
assertion, Chief Judge Smith Camp did not make an alternate finding that even if a
promise had been made, the plaintiffs failed to allege adequately that they reasonably
and foreseeably relied on that promise. Thus, Chief Judge Smith Camp’s order does
not compel the conclusion that the plaintiffs are unable to satisfy the “reasonable
reliance” element of their fraudulent misrepresentation, fraudulent concealment, and
negligent misrepresentation claims.
D.
The “Blurring” of Counts I-III with Count IV
Finally, the defendants argue that the portion of Count IV that alleges, “In
reasonable reliance on the false information, QA3 did not pursue negotiations with
other broker dealers and was damaged as alleged,” (Am. Compl. ¶ 69, ECF No. 43),
22
fails to state an unjust enrichment claim because “QA3 does not allege how its
alleged decision to forego other negotiations benefitted defendants,” (Defs.’ Br. at 11,
ECF No. 50). The plaintiffs do not resist this argument, (see generally Pls.’ Response
Br., ECF No. 57), and I agree with the defendants that this component of Count IV
does not state an unjust enrichment claim upon which relief may be granted. See,
e.g., Abrahamson v. First National Bank of Holdrege, No. 4:05cv3039, 2006 WL
277109, at *6 (D. Neb. Feb. 3, 2006) (“Under Nebraska law, a party can recover on
a claim for unjust enrichment only when ‘benefits have been received and retained
under such circumstances that it would be inequitable and unconscionable to permit
the party receiving the benefits to avoid payment therefor.’” (citation omitted)).
In summary, I find that the plaintiffs have failed to state a viable unjust
enrichment claim based on the theory that they were damaged by their decision to
forego “negotiations with other broker dealers.” (Am. Compl. ¶ 69, ECF No. 43.)
I cannot dismiss Counts I-III based upon any of the arguments advanced by the
defendants, however.
IT IS THEREFORE ORDERED that:
1.
The defendants’ motion to dismiss, ECF No. 49, is granted in part.
2.
To the extent that Count IV alleges an unjust enrichment claim based on
the theory that the plaintiffs were damaged by their decision not to
pursue negotiations with other broker dealers, Count IV is dismissed for
failure to state a claim upon which relief may be granted.
23
3.
In all other respects, the defendants’ motion to dismiss is denied.
Dated March 19, 2013.
BY THE COURT
__________________________________________
Warren K. Urbom
United States Senior District Judge
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