Kinzel, et al v. Bank of America, et al
Filing
48
Order : Defendants' motion to dismiss count one of plaintiffs' complaint is denied. Defendants' motion to dismiss all other counts in plaintiffs' complaint is granted. A scheduling conference is set for November 21, 2011 at 10:30 a.m. Out of town counsel may participate by phone. (Related Doc # 41 ). Judge James G. Carr on 11/1/2011.(S,AL)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OHIO
WESTERN DIVISION
Richaed Kinzel, et al.
Case No. 3:10CV2169
Plaintiffs
v.
ORDER
Merrill Lynch Bank U.S.A., et al.
Defendants
This is a dispute over liquidation of collateral that secured a loan.
On April 15, 2008, plaintiffs Richard Kinzel and Judith Kinzel took out a loan with
defendant Merrill Lynch Bank U.S.A. (“Merrill Lynch Bank”), using as collateral stock in Cedar
Fair LLC, which they held in accounts with Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Merrill Lynch Bank & Trust Company (collectively “Merrill Lynch”).
The Kinzels claim that Merrill Lynch wrongfully sold their pledged collateral in breach of
their “Loan Management Account Agreement” (Agreement). Their second amended complaint
asserts six claims against Merrill Lynch: 1) breach of contract – violation of the duty to act with
good faith and fair dealing; 2) outrageous conduct; 3) conversion; 4) unjust enrichment; 5) estoppel;
and 6) fraud.
Jurisdiction is proper under 28 U.S.C. § 1332.
Pending is defendants’ motion to dismiss under Fed. R. Civ. P. 12(b)(6). [Doc. 41]. For the
reasons discussed below, defendants’ motion is granted in part and denied in part.
Background
1
Plaintiffs’ Agreement with Merrill Lynch required the value of the collateral to remain above
a designated level (the “Maintenance Requirement”). The Agreement gave exclusive discretion to
Merrill Lynch to determine whether the collateral met this requirement.
The Agreement also stated that Merrill Lynch could call the loan at any time – likewise at
its sole discretion. It also granted several remedies to Merrill Lynch. Among these were a demand
for immediate repayment and liquidation of pledged collateral.
Under the Agreement, Merrill Lynch could implement the remedies in response to a
“triggering event” or at any time. Among the triggering events was a decline in the value of the
collateral below the Maintenance Requirement.
The Kinzels made regular payments on the loan throughout 2008 and early 2009. In February
or March, 2009, Merrill Lynch Bank notified the Kinzels that at some future date it would call the
loan. The Kinzels allege that they repeatedly told Merrill Lynch not to sell their Cedar Fair stock.
The Kinzels also allege that Merrill Lynch assured them they would not sell the Cedar Fair stock
so long as they were able to continue to pay down the balance of the loan.
By the end of February, 2009, the value of the pledged collateral had dropped below the
Maintenance Requirement. On March 3, 2009, Merrill Lynch sold 167,900 shares of Cedar Fair
stock from the Kinzels’ securities accounts. Merrill Lynch Bank applied the proceeds of
$1,071,291.39 to the Kinzels’ loan balance.
Defendants argue that plaintiffs have failed to state claims on which they can obtain relief
and, alternatively, plead their claims with sufficient particularity.
Standard of Review
2
A claim survives a motion to dismiss under Rule12(b)(6) if it “contain[s] sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Bell Atlantic Corp.
v. Twombly, 550 U.S. 544, 547 (2007). “The plausibility standard is not akin to a ‘probability
requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.”
Id. A complaint’s “[f]actual allegations must be enough to raise a right to relief above the
speculative level, on the assumption that all of the complaint’s allegations are true.” Id. at 555–56.
A complaint is insufficient “if it tenders naked assertions devoid of further factual
enhancement.” Ashcroft v. Iqbal,
U.S.
,
, 129 S. Ct. 1937, 1949 (2009) (citing Twombly,
supra, 550 U.S. at 557) (internal quotation omitted).
I must “construe the complaint in the light most favorable to the plaintiff.” Inge v. Rock Fin.
Corp., 281 F.3d 613, 619 (6th Cir. 2002). Plaintiff, however, must provide “more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly,
supra, 550 U.S. at 555; see also Iqbal, 550 U.S. at , 129 S. Ct. at 1949 (“Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do not suffice.”).
Choice of Law
Plaintiffs and defendants both point out that the Agreement from which the breach of
contract claims arise designates Utah law as controlling. A federal court sitting in diversity must
apply the choice-of-law principles of the forum state. Cole v. Mileti, 133 F.3d 433, 437 (6th Cir.
1998). Ohio courts have adopted the Restatement of Law 2d, Conflicts of Law in dealing with
choice-of-law issues with regard to contractual claims. Schulke Radio Productions, Ltd. v.
Midwestern Broadcasting Co., 6 Ohio St.3d 436, 438-39 (Ohio 1983). The Restatement, § 187,
states:
3
[The] law of the state chosen by the parties to govern their contractual rights and
duties will be applied . . . unless either
(a) the chosen state has no substantial relationship to the parties or the transaction
and there is no other reasonable basis for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental
policy of a state which has a materially greater interest than the chosen state in the
determination of the particular issue and which, under the rule of § 188, would be the
state of the applicable law in the absence of an effective choice of law by the parties.
Merrill Lynch Bank appears to have been based in Salt Lake City, Utah, at the time of the
Agreement [Doc. 1, Exh. 1, p. 13]. This suffices to give rise to a “substantial relationship.” Schulke,
6 Ohio St.3d at 439. Additionally, given that the Agreement involved sophisticated parties, and
neither party contests the application of Utah law, there is no reason to believe that application of
the choice-of-law provision in the Agreement would be improper.
For the remaining claims that do not stem from the Agreement but rather the allegedly
improper sale of collateral, the parties agree that Ohio law should apply.
Discussion
1. Breach of Contract/Breach of Implied Covenant
of Good Faith and Fair Dealing
Plaintiffs claim that defendants violated the implied covenant of good faith and fair dealing
by selling the Cedar Fair stock which they pledged as collateral for their loan.
An “implied covenant of good faith and fair dealing inheres in every contract.” Eggett v.
Wasatch Energy Corp., 94 P.3d 193, 197 (Utah 2004). Utah courts have been careful to interpret the
covenant not “to establish new, independent rights or duties not agreed upon by the parties.” Malibu
Investment Co. v. Sparks, 996 P.2d 1043, 1048 (Utah 2000) (internal quotation marks omitted). The
4
Agreement explicitly states that the determination of the Maintenance Requirement (a remedytriggering event), and any subsequent sale of collateral, was in the sole discretion of defendants.
Utah courts have held that “[w]here the contract allows discretion but does not provide any
express standard for exercising that discretion, the covenant imposes an objective standard of
reasonableness.” Markham v. Bradley, 173 P.3d 865, 872 (Utah Ct. App. 2007) (citing Olympus
Hills Shopping Center, Ltd. v. Smith's Food & Drug Centers, Inc., 889 P.2d 445 (Utah Ct.
App.1994); Leigh Furniture & Carpet Co. v. Isom, 657 P.2d 293, 311 (Utah 1982)).
The documents presently before me contain no indication of that the parties adopted a
“precise formula or test under which discretion [would] be exercised.” Id.
Defendants argue that because plaintiffs agreed to put the maintenance requirement and any
subsequent actions in defendants’ sole discretion, they cannot now challenge their exercise of such
discretion or that it be subject to external requirements. Their argument does not adequately respond
to the Utah doctrine that, absent a “precise formula under which” they are to exercise their
discretion, the implied covenant of good faith and fair dealing “imposes an objective standard of
reasonableness.”
“[W]hether there has been a breach of good faith and fair dealing is a factual issue, generally
inappropriate for decision as a matter of law.” Oman v. Davis School Dist., 194 P.3d 956, 968 (Utah
2008) (internal quotation marks omitted). Plaintiffs have alleged sufficient facts to make out a
plausible claim for the breach of the implied covenant of good faith and fair dealing.
2. Outrageous Conduct
Plaintiffs allege that defendants’ actions constituted actionable outrageous conduct, causing
plaintiffs “significant mental anguish and embarrassment.”
5
To make out a claim for intentional infliction of emotional distress, plaintiffs “must allege
facts sufficient to establish that: 1) the defendant intended to cause the plaintiff serious distress; 2)
its conduct was extreme and outrageous; and 3) its action was a proximate cause of plaintiff's serious
emotional distress.” Aker v. New York and Co., Inc., 364 F.Supp.2d 661, 667 (N.D. Ohio 2005). For
conduct to be considered “extreme and outrageous”, it must be “ ‘so outrageous in character, and
so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as
atrocious, and utterly intolerable in a civilized community.’ ” Badri v. Huron Hosp., 691 F.Supp.2d
744, 771 (N.D. Ohio 2010) (quoting Yeager v. Local Union 20, Teamsters, 6 Ohio St.3d 369, 375
(1983)).
Plaintiffs do not allege any course of conduct that rises to this level. Although plaintiffs
argue that the sale of their pledged collateral was unauthorized and unjustified, they do not contend
that there are no circumstances under which the sale would have been allowed. Defendants’
contentions regarding this claim are well taken, and this claim must be dismissed.
3. Conversion
Plaintiffs allege in their complaint that the sale of their Cedar Fair stock constituted an
unlawful conversion by defendants, as they did not have the authority to make the sale.
To make out a claim for conversion under Ohio law, plaintiffs “must establish three
elements: (1) plaintiff's ownership or right to possession of the property at the time of conversion;
(2) defendant's conversion by a wrongful act or disposition of plaintiff's property rights; and (3)
damages.” City of Findlay v. Hotels.Com, L.P., 441 F.Supp.2d 855, 865 (N.D. Ohio 2006) (internal
quotation marks omitted). When the party charged with conversion lawfully holds the property, the
party claiming conversion must have unsuccessfully demanded that the holder return it. Id.
6
Plaintiffs do not claim that Merrill Lynch unlawfully held the Cedar Fair stock – in fact, they
acknowledge that they submitted the stock to Merrill Lynch’s control as collateral for their loan.
Plaintiffs also do not allege that they made a demand for the return of their stock. Indeed, plaintiffs
had no basis for such demand: until they had paid off the loan the collateral remained rightfully in
defendants’ hands.
Plaintiffs fail to allege facts necessary to assert a claim of conversion, and the claim must be
dismissed.
4. Estoppel
Plaintiffs allege that defendants made assurances that their Cedar Fair stock would not be
sold if they timely paid off the loan, and plaintiffs relied on these assurances to their detriment.
To state a claim for promissory estoppel under Ohio law, a plaintiff must plead: 1) a clear
and unambiguous promise; 2) reliance by the party to whom the promise was made; 3) reasonable
and foreseeable reliance; and 4) injury resulting from the reliance. Patrick v. Painesville
Commercial Properties Inc., 123 Ohio App.3d 575, 583 (1997).
Plaintiffs’ claim relies on the alleged “assurances” made by Merrill Lynch that their Cedar
Fair stock would not be sold. Plaintiffs state that “they were told by the defendants that they were
taking all the right actions to prevent the sale of their collateral.” [Doc. 36 at ¶ 2]. This does not
constitute a “clear and unambiguous promise” not to sell the pledged collateral. Plaintiffs fail to
make out a the necessary elements for a claim of promissory estoppel, and the claim must be
dismissed.
5. Unjust Enrichment
7
Plaintiffs claim that the allegedly wrongful sale of the Cedar Fair stock unjustly enriched the
defendants.
To state a claim for unjust enrichment under Ohio law, plaintiffs must allege: “(1) a benefit
conferred by a plaintiff upon a defendant; (2) knowledge by the defendant of the benefit; and (3)
retention of the benefit by the defendant under circumstances where it would be unjust to do so
without payment.” Hambleton v. R.G. Barry Corp., 12 Ohio St.3d 179, 183 (Ohio 1984) (internal
quotation marks omitted).
Plaintiffs specify no facts to substantiate their claim of unjust enrichment beyond a
conclusory statement that defendants made the sale “at a great corporate profit for themselves.”
[Doc. 36 at ¶ 41]. This fails to meet the pleading standards as it does not elevate the claim beyond
mere speculation.
In any event, the complaint itself acknowledges that the defendants applied the proceeds
against the outstanding balance on the loan. This hardly constitutes a “plausible” claim of unjust
enrichment.
Plaintiffs have not made out a claim for unjust enrichment, and the claim should be
dismissed.
6. Fraud
Plaintiffs assert two general frauds: first, defendants’ concealment of their precarious
financial condition and second, defendants’ affirmative representation that the company functioned
ethically.
Under Ohio law, to make out a claim for fraud, plaintiffs must allege
(1) a representation (or concealment of a fact when there is a duty to disclose) (2)
that is material to the transaction at hand, (3) made falsely, with knowledge of its
8
falsity or with such utter disregard and recklessness as to whether it is true or false
that knowledge may be inferred, and (4) with intent to mislead another into relying
upon it, (5) justifiable reliance, and (6) resulting injury proximately caused by the
reliance.
Volbers-Klarich v. Middletown Mgt., Inc., 125 Ohio St.3d 494, 501 (Ohio 2010).
A. Concealment of Defendants’ Financial Condition
A duty to disclose material facts arises when there is a fiduciary relationship between two
parties. In re National Century Financial Enterprises, Inc., Inv. Litigation, 604 F.Supp.2d 1128,
1150 (S.D. Ohio 2009) (quoting State v. Warner, 55 Ohio St.3d 31, 54 (Ohio 1990)). Ohio courts
have held that “the relationship of debtor and creditor, without more, is not a fiduciary relationship.”
Blon v. Bank One, Akron, N.A., 35 Ohio St.3d 98, 101 (Ohio 1988).
Ohio statutory law establishes the same principle: “Unless otherwise expressly agreed in
writing, the relationship between a bank and its obligor, with respect to any extension of credit, is
that of a creditor and debtor, and creates no fiduciary or other relationship between the parties.”
O.R.C. § 1109.15.
Plaintiffs have failed to allege any facts which would demonstrate that defendants had a duty
to disclose their general financial condition to plaintiff, and therefore fail to make out a claim for
fraud on the basis of concealment of material facts.
B. Affirmative Misrepresentations of Defendants’ Ethics
A plaintiff must plead fraud with particularity. Fed. R. Civ. P. 9(b). At a minimum, this
requires a plaintiff to “allege the time, place, and content of the alleged misrepresentations on which
he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury
resulting from the fraud.” U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 504 (6th Cir.
2007) (quoting Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir. 1993) (internal quotation marks
9
and citations omitted)); see also Michaels Bldg. Co. v. Ameritrust Co., N.A., 848 F.2d 674, 680 (6th
Cir. 1988) (finding fraud count sufficient under Rule 9(b)).
Plaintiffs fail to meet the burden of particularity. They rely on various publications and
statements from Merrill Lynch, but do not specify how these statements were directed at them, who
made these statements particularly, or how the misrepresentations played a role in their decision to
take out a loan from Merrill Lynch. Perhaps most importantly, plaintiffs fail to allege fraudulent
intent on the part of any specific defendant.
Plaintiffs’ claim for fraudulent concealment of material facts must be dismissed.
Conclusion
For the foregoing reasons it is therefore,
ORDERED THAT:
1. Defendants’ motion to dismiss count one of plaintiffs’ complaint be, and the same hereby
is, denied.
2. Defendants’ motion to dismiss all other counts in plaintiffs’ complaint be, and the same
hereby is, granted.
3. A scheduling conference is set for November 21, 2011 at 10:30 a.m. Out of town counsel
may participate by phone.
So ordered.
s/James G. Carr
James G. Carr
Sr. United States District Judge
10
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?