Larson Manufacturing et al v. Western Showcase Homes et al
Filing
78
ORDER denying 52 Motion for Judgment on the Pleadings. Signed by US Magistrate Judge Veronica L. Duffy on 1/30/2018. (CG)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
LARSON MANUFACTURING COMPANY
OF SOUTH DAKOTA, INC., SUPERIOR
HOMES, LLC,
Plaintiffs/Counterclaim
Defendants,
vs.
4:16-CV-04118-VLD
ORDER DENYING DEFENDANTS'
MOTION FOR JUDGMENT ON THE
PLEADINGS
AMERICAN MODULAR HOUSING
GROUP, LLC and PAUL THOMAS,
Docket No. 52
Defendants,
and WESTERN SHOWCASE HOMES,
INC. and AMERICAN MODERN
HOUSING GROUP, INC.
Defendants/Counterclaim
Plaintiffs.
INTRODUCTION
This matter is before the court on the basis of diversity jurisdiction, 28
U.S.C. § 1332, after defendants removed the matter from South Dakota state
court. See Docket No. 1, 1-1. The parties have consented to this magistrate
judge handling their case pursuant to 28 U.S.C. § 636(c). Now pending is
defendants' motion for judgment on the pleadings regarding plaintiffs’ fraud
claims. See Docket No. 52. Plaintiffs oppose the motion. See Docket No. 63.
FACTS
A.
Background Facts and Claims
The court states the following facts from plaintiffs' second amended
complaint in order to evaluate defendants' pending motion. Plaintiff Larson
Manufacturing Company of South Dakota, Inc. (Larson) is the parent company
of plaintiff Superior Homes, LLC (Superior). See Docket No. 58 at p. 1. Both
are South Dakota business entities. Id. Superior is in the business of
manufacturing and selling modular homes. Id. at p. 2.
Defendant Western Showcase Homes, Inc. ("Western") is a Nevada
corporation in the business of purchasing, reselling, and financing modular
homes. Id. at p. 2. Defendant Paul Thomas, a Nevada resident, is the sole
member of American Modular Housing Group, LLC (AMHG, LLC), a Nevada
company in the business of buying and reselling modular homes. Id.
American Modular Housing Group, Inc. (AMHG, Inc.), is a Canadian
corporation with its principal place of business in Nevada that also buys and
resells modular homes. Id. Thomas is the principal agent and owner of both
AMHG entities. Id.
The defendant entities purchased modular homes from Superior and
then re-sold those homes to customers, sometimes arranging for delivery, set
and completion of the home at the customer's location. Id. at pp. 2-3. Larson
and Superior extended credit to the defendant entities for these purchases;
AMHG would then repay the loans when its customer paid the defendant
entities. Id. at p. 3.
2
The second amended complaint recites that defendant entities placed
orders for fourteen modular homes with plaintiffs. Plaintiffs constructed the
homes. Of the homes that were delivered to defendants, full payment was
never made even though the complaint alleges the ultimate customers who
received these homes paid defendants. Other modular homes ordered by
defendants were custom-built and never delivered because defendants never
paid for the homes. As to the homes plaintiffs retain possession of, plaintiffs
allege the custom nature of the homes makes resale of the homes at a
reasonable value impracticable.
In addition, Larson entered into a loan agreement with Western which
was guaranteed by AMHG, Inc. This loan agreement ultimately encompassed
$14 million in funds. Larson alleges that Western defaulted on the loan and
AMHG, Inc. refused to pay pursuant to its guarantee. For all these matters,
plaintiffs assert three counts of breach of contract, two counts of fraud, two
counts of conversion, one count each of debt and guarantee, and one count of
piercing the corporate veil.1 Plaintiffs also allege defendant Thomas converted
The plaintiffs’ first amended complaint contained several additional claims.
See Docket 1-6. During the course of this litigation in federal court, however,
the parties reached a settlement agreement regarding several of the claims
contained within the first amended complaint and the defendants’
counterclaims against the plaintiffs which were associated with those settled
claims. As a result of the settlement agreement, the parties agreed to dismiss
the affected claims/counterclaims in this lawsuit. Plaintiffs eventually moved
to compel enforcement of the settlement agreement (Docket 31), and the court
granted that motion. Docket 50. Thereafter, the plaintiffs filed their second
amended complaint, which appears to have deleted the claims which are the
subject of the settlement agreement. Docket 58. Likewise, the defendants filed
their amended counterclaim, which appears to have deleted the counterclaims
which are the subject of the settlement agreement. Docket 57.
3
1
money which was received from third parties and intended for plaintiffs, but
was instead used by Mr. Thomas for his own personal use. See Docket No. 58
at ¶¶ 15, 20, 49- 51.
In their answer to the second amended complaint, defendants generally
deny nearly all of plaintiffs' allegations. See Docket No. 62. Defendants
Western Showcase, Inc., and American Modular Housing Group, Inc., assert
five counterclaims against Larson and Superior. Docket No. 57. Those
counterclaims include breach of contract (failure to pay rebates, failure to
repay personal loans from Thomas and failure to provide future promised
business); unjust enrichment (rebates, warranty and service fees); tortious
interference with business expectancy (Aspen Links Country Club and Aspen
Village Properties); breach of contract (manufacturing defects in modular
homes); and fraud and deceit (fraudulent inducement to sign a mortgage in
connection with Aspen Village and McKenzie Lane, assignment of mortgage
interest in Moose Ridge, fraudulent building practices ). See Docket No. 57 at
pp. 7-9. Defendants/counterclaim plaintiffs Western Showcase, Inc. and
AMHG, Inc. seek compensatory and punitive damages on their counterclaims,
pre- and post-judgment interest, attorney's fees, and other remedies. Id. at 9.
The dates of the business transactions alleged by plaintiffs in their
second amended complaint go back as far as April, 2012, and extend into the
year 2016. See Docket No. 58.
4
B.
Fraud Allegations in Plaintiffs’ Second Amended Complaint
The defendants move for judgment on the pleadings based upon their
assertion that, pursuant to FED. R. CIV. P. 9(b), the fraud allegations contained
within the plaintiffs’ second amended complaint are insufficient as a matter of
law. Before analyzing the applicable law, therefore, the court extracts the fraud
allegations in the second amended complaint. Counts 5 and 8 of the second
amended complaint are both entitled “fraud and deceit,” and are both leveled
against Paul Thomas in his personal capacity. Docket 58, p. 7, ¶¶ 53-58
(count 5); pp. 9-10, ¶¶ 75-79 (count 8). Count 5 pertains to the
representations Paul Thomas made to defendants regarding the Aspen Units in
particular. It states as follows:
Thomas made representations of fact to Larson that he would
collect and forward to Larson the proceeds received for sale of the
Aspen Units to which Larson was entitled. At the time Thomas
made said representations of fact, he knew or had reasonable
grounds for believing them not to be true. Thomas made said
representations of fact with the intent to induce Larson to fund the
purchase of the Aspen Units. Larson relied on said
representations of fact and funded AMHG, LLC’s purchase of the
Aspen Units. As a result of Thomas’s deceit, Aspen has been
injured in an amount to be proven at trial.
See Docket 58, ¶¶ 54-58.
Count 8 pertains to the representations made by Paul Thomas to the
plaintiffs regarding the intent and ability of Mr. Thomas and his entities to
perform their obligations pursuant to credit contracts and money advances
granted to
Mr. Thomas and his entities by the plaintiffs, as well as the
purpose for which the monies received would be used. Count 8 states as
follows:
5
Over the course of the dealings between the Thomas Entities and
Plaintiffs, Thomas made representations of fact asserting his
intention to perform his and the Thomas Entities’ obligations
under the respective contracts, asserting the Thomas Entities were
able to pay such obligations, and asserting advances provided by
Plaintiffs would be used for modular unit purchases and real
estate development purchases. Thomas made those
representations of fact with the intent to induce Plaintiffs’ reliance
on those representations. Plaintiffs relied on Thomas’s
representations by manufacturing and shipping Units to the
Thomas Entities without prepayment and by advancing monies
under the Credit Agreement to the Thomas Entities. As a result of
Plaintiffs’ reliance on Thomas’s representations they were injured
in an amount to be proven at trial.
Finally, both count 5 and count 8 incorporate the allegations contained
within all the other causes of action contained within the complaint. See
Docket 58, ¶¶ 53 and 75.
DISCUSSION
A.
Provisions of Rule 9(b)
Rule 9(b) of the Federal Rules of Civil Procedure requires that allegations
of fraud contained within a civil complaint must be made with sufficient
particularity. See FED. R. CIV. P. 9(b). The circumstances constituting fraud
must be alleged with particularity, but Rule 9(b) instructs that “malice, intent,
knowledge, and other conditions of a person’s mind may be alleged generally.”
Id.
B.
Defendants Have Not Waived Their Opportunity to Object to the
Sufficiency of Plaintiffs’ Fraud Allegations
Plaintiffs assert the defendants waived their opportunity to move for
judgment on the pleadings based upon FED. R. CIV. P. 9(b). The plaintiffs
theorize that because defendants filed an answer to both the amended
6
complaint and the second amended complaint without first or simultaneously
making a specific objection/motion to dismiss based upon plaintiffs’ allegedly
insufficient fraud allegations, the defendants are precluded from doing so now.
Relevant to this argument are FED. R. CIV. P. 12(b), (c), (g), and (h). Those
Rules provide:
Rule 12.
Defenses and Objections: When and How
Presented; Motion for Judgment on the Pleadings;
Consolidating Motions; Waiving Defenses; Pretrial Hearing.
(b)
How To Present Defenses. Every defense to a claim for
relief in any pleading must be asserted in the responsive pleading
if one is required. But a party may assert the following defenses by
motion:
(1) lack of subject-matter jurisdiction;
(2) lack of personal jurisdiction;
(3) improper venue;
(4) insufficient process;
(5) insufficient service of process;
(6) failure to state a claim upon which relief may be granted;
and
(7) failure to join a party under Rule 19.
A motion asserting any of these defenses must be made before
pleading if a responsive pleading is allowed. If a pleading sets out
a claim for relief that does not require a responsive pleading, an
opposing party may assert at trial any defense to that claim. No
defense or objection is waived by joining it with one or more other
defenses or objections in a responsive pleading or in a motion.
(c)
Motion for Judgment on the Pleadings. After the
pleadings are closed—but early enough not to delay trial—a party
may move for judgment on the pleadings.
***
(g)
Joining Motions.
(1) Right to Join. A motion under this rule may be joined
with any other motion allowed by this rule.
(2) Limitation on Further Motions. Except as provided in
Rule 12(h)(2) or (3), a party that makes a motion under this rule
must not make another motion under this rule raising a defense or
objection that was available to the party but omitted from its
earlier motion.
7
(h)
Waiving and Preserving Certain Defenses.
(1) When Some Are Waived. A party waives any defense
listed in Rule 12(b)(2)-(5) by :
(A) omitting it from a motion in the circumstances
described in Rule 12(g)(2); or
(B) failing to either:
(i) make it by motion under this rule; or
(ii) include it in a responsive pleading or in
an amendment allowed by Rule 15(a)(1) as
a matter of course.
(2) When to raise others. Failure to state a claim upon
which relief may be granted, to join a person required by Rule
19(b), or to state a legal defense to a claim may be raised:
(A) in any pleading allowed or ordered under
Rule 7(a);
(B) by a motion under Rule 12(c); or
(C) at trial.
See FED. R. CIV. P. 12(b),(c),(g) & (h).
Plaintiffs assert that an objection to insufficient fraud pleadings in the
complaint under FED. R. CIV. P. 9(b) should be likened to the defenses
contained within FED. R. CIV. P. 12(b)(2) through (5), which are waived unless
they are made by motion within or before a responsive pleading is filed. See
FED. R. CIV. P. 12(b) & (h). The plaintiffs argue that the purpose of FED. R. CIV.
P. 9(b) is to provide the party responding to a claim of fraud with a
higher degree of notice, enabling the defendant to respond
specifically, at an early stage of the case, to potentially damaging
allegations of immoral and criminal conduct. Thus, a plaintiff
must specifically allege the circumstances constituting fraud, Fed.
R. Civ. P. 9(b), including "such matters as the time, place and
contents of false representations, as well as the identity of the
person making the representation and what was obtained or given
up thereby.”
Abels v. Farmers Commodities Corp., 259 F.3d 910, 920 (8th Cir. 2001) (citing
Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982)).
8
Plaintiffs also observe that defendants did respond to the fraud
allegations not once, but twice by filing answers to the amended complaint and
second amended complaint without alleging the insufficiency of the fraud
claims. Given the stated purpose for Rule 9(b), plaintiffs urge that defendants’
current claim should be akin to a Rule 12(b) (2) through (5) defense which is
waived if not raised simultaneously with or before the answer was filed. There
is limited authority which supports the plaintiffs’ theory. See e.g. Davsko v.
Golden Harvest Products, Inc., 965 F.Supp. 1467, 1474 (D. Kan. 1997)
(“[D]efendants answered plaintiff’s complaint without raising any objection
under Rule 9(b). Defendants cannot argue almost a year later that plaintiff
failed to plead fraud with particularity.”); HMBI, Inc. v. Schwartz, 2009 WL
3390865 (N.D. Ind., Oct. 19, 2009) (likening Rule 9(b) motion to Rule 12(b)(2)
through (5) defenses which must be raised before the responsive pleading is
filed or they are waived).
In HMBI, the court held that because the defendant’s answer simply
denied the fraud allegations in the plaintiff’s complaint, the defendant waived
its opportunity to later challenge the sufficiency of the fraud allegations under
Rule 9(b). Id. at * 6. The court explained:
The defendant did not raise its Rule 9(b) objection in its first
responsive pleading, and thus waived the objection. Additionally,
the defendant’s denial of the fraud charge indicates that it had
been pleaded sufficiently to permit the framing of an adequate
response pleading. Thus, the court finds the defendant’s argument
that the plaintiff plead its fraud claim with particularity under Rule
9(b) without merit, and the defendant has already waived that
ground.
Id.
9
The Eighth Circuit, however, has allowed a defendant to challenge the
sufficiency of a plaintiff’s fraud pleadings under FED. R. CIV. P. 9(b) by way of a
motion to dismiss pursuant to FED. R. CIV. P. 12(b)(6) for failure to state a claim
upon which relief may be granted. See e.g., OmegaGenesis Corp. v. Mayo
Foundation for Medical Education and Research, 851 F.3d 800, 804 (8th Cir.
2017) (court used Rule 12(b)(6) standards to determine plaintiff’s fraud claims
were insufficient pursuant to Rule 9(b)). Failure to state a claim upon which
relief may be granted is not a defense which is waived if not asserted before or
in the answer. And, FED. R. CIV. P. 12(h)(2) specifically instructs that motions
to dismiss for failure to state a claim may alternatively be brought by a motion
for judgment on the pleadings under FED. R. CIV. P. 12(c). Motions under FED.
R. CIV. P. 12(c) may be brought at any time after the close of pleadings, so long
as the motion does not delay the trial.2
The Eighth Circuit explained the interplay between Rule 12(b)(6), Rule
12(c) and Rule 12(h) in Westcott v. City of Omaha, 901 F.2d 1486, 1488 (8th
Cir. 1990). In that case, the defendant made a motion to dismiss based on the
defense of sovereign immunity after it had filed its answer, so the court treated
the motion as a motion for judgment on the pleadings pursuant to Rule 12(c)
and ultimately dismissed the case for failure to state a claim upon which relief
could be granted. Id. at 1490. In affirming the district court’s dismissal, the
Eighth Circuit noted:
No trial date has been set for this case, so the defendants’ motion for
judgment on the pleadings has not caused delay of the trial in this matter.
10
2
The parties agree that this case should be analyzed under the
rubric of Federal Rule of Civil Procedure 12(b)(6). Technically,
however, a Rule 12(b)(6) motion cannot be filed after an answer
has been submitted. See FED. R. CIV. P. 12(b). But since Rule
12(h)(2) provides that “[a] defense of failure to state a claim upon
which relief can be granted” may be advanced in a motion for
judgment on the pleadings under Rule 12(c), we will treat the City’s
motion as if it had been styled a 12(c) motion. St. Paul Ramsey
County Med. Ctr. v. Pennington County, 857 F.2d 1185, 1187 (8th
Cir. 1988). This distinction is purely formal, because we review
this 12(c) motion under the standard that governs 12(b)(6)
motions. Id; accord Morgan v. Church’s Fried Chicken, 829 F.2d
10, 11 (6th Cir. 1987( (collecting cases).
Id. At 1488.
Despite the limited, non-binding authority which supports the plaintiffs’
waiver argument, this court finds the above authority more persuasive. It
appears the Eighth Circuit would allow the sufficiency of fraud pleadings in a
complaint to be decided in the context of a Rule 12(b)(6) motion to dismiss or a
Rule 12(c) motion for judgment on the pleadings. This court therefore opts to
decide the defendants’ motion on the merits instead of on a default or waiver
theory.
C.
The Defendants’ Motion Was Not Mooted By The Filing Of The
Second Amended Complaint
Normally, when an amended complaint is filed, the effect is to supersede
the original complaint, rendering the original complaint of no legal effect.
Thomas v. United Steelworkers Local 1938, 743 F.3d 1134, 1139 (8th Cir.
2014). As such, a motion to dismiss which is based upon the original
complaint is technically moot after an amended complaint is filed, because the
original complaint no longer has any legal effect. Pure Country, Inc. v. Sigma
Chi Fraternity, 312 F.3d 952, 956 (8th Cir. 2002).
11
When it granted their motion to enforce the partial settlement agreement,
the court ordered the plaintiffs to file a second amended complaint which
accurately reflected claims which remained after the settlement. See Docket
No. 50, p. 11. The plaintiffs did so two days after the defendants filed their
motion for judgment on the pleadings. See Docket Nos. 52 & 58. The fraud
allegations which the defendants alleged were insufficient in the amended
complaint (Docket No. 1-6) (the fraud claims against Mr. Thomas individually),
appeared at counts 18 and 21 of the amended complaint. See Docket 1-6,
¶¶ 161-166 & 183-186. These fraud claims were not part of the claims that
were resolved by the settlement agreement. As such, they appear in the
plaintiffs’ second amended complaint at count 5 (¶¶ 53-58) and count 8
(¶¶ 75-79). These claims appear in the second amended complaint in identical
or substantially identical form as they did in the amended complaint.
Nevertheless, the plaintiffs assert in a footnote of their memorandum that the
defendants’ motion for judgment on the pleadings is moot because it was filed
based upon the now mooted amended complaint.
In cases where the allegations in the replacement pleading are
substantially similar to the mooted pleading, the court has the discretion to
consider a pending motion to dismiss as being made against the replacement
pleading and to decide the motion accordingly. Cartier v .Wells Fargo National
Bank, N.A., 547 Fed. Appx. 800, 804 (8th Cir. 2013) (unpub’d). See also 6C
Charles Allen Wright & Arthur R. Miller, Federal Practice & Procedure, § 1476
(3d ed.) ([“D]efendants should not be required to file a new motion to dismiss
12
simply because an amended pleading was introduced while their motion was
pending. If some of the defects raised in the original motion remain in the new
pleading, the court simply may consider the motion as being addressed to the
amended pleading. To hold otherwise would be to exalt form over substance.”).
Such is the case here. For this reason, the court considers the defendants’
motion for judgment on the pleadings to have been directed at the plaintiffs’
second amended complaint, and decides the motion based upon the allegations
found at count 5 ( ¶¶ 53-58) and count 8 (¶¶75-79) of the second amended
complaint.
D.
Standards Applicable To The Defendants’ Motion For Judgment
On The Pleadings Pursuant To FED. R. CIV. P. 12(c)
In Westcott, the court observed that “we review this (12(c) motion under
the standard that governs 12(b)(6) motions.” Westcott, 901 F.2d at 1488. In
Clemons v. Crawford, 585 F.3d 1119 (8th Cir. 2009), the court reiterated that
12(b)(6) and 12(c) motions are reviewed under the same standard. Id. at 1124.
The difference is that a 12(b) motion may be made as soon as the plaintiff has
filed the complaint, while a 12(c) motion cannot be made until the pleadings
have closed. 5C Charles A. Wright & Arthur R. Miller, Federal Practice &
Procedure, § 1369 (3d ed.). Additionally, a 12(b)(6) motion is directed solely at
the sufficiency of the plaintiff’s statement of the claim, while a 12(c) motion
seeks to resolve the claim on the merits, similar to a motion under Rule 56. Id.
The Westcott court explained “a grant of judgment on the pleadings is
appropriate ‘where no material issue of fact remains to be resolved and the
movant is entitled to a judgment as a matter of law.’ ” Id. (quoting Faibisch v.
13
Univ. of Minnesota, 304 F.3d 797, 803 (8th Cir. 2002)). And, also similar to a
summary judgment motion, “all factual inferences and intendments are taken
against the moving party under both Rule 12(c) and Rule 56, and neither
motion will be granted unless the movant is entitled to judgment as a matter of
law.” 5C Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure,
§ 1369 (3d ed.).
Under FED. R. CIV. P. 12(b)(6), dismissal is appropriate if the plaintiff has
failed to state a claim upon which relief can be granted. Plaintiffs must plead
Aenough facts to state a claim to relief that is plausible on its face.@ Atlantic
Corp. v. Twombly, 550 U.S. 544, 570 (2007)(emphasis added).
Under Federal Rule of Civil Procedure 8(a)(2), a plaintiff must plead only
Aa short and plain statement of the claim showing that the pleader is entitled to
relief.@ Id. at 554-55 (quoting FED. R. CIV. P. 8(a)(2)). A complaint does not
need Adetailed factual allegations@ to survive a motion to dismiss, but a plaintiff
must provide the grounds for his entitlement to relief and cannot merely recite
the elements of his cause of action. Id. at 555 (citing Papasan v. Allain, 478
U.S. 265, 286 (1986)). There is also a Aplausibility standard@ which Arequires a
complaint with enough factual matter (taken as true)@ to support the
conclusion that the plaintiff has a valid claim. Id. at 556. The plaintiffs’
complaint must contain sufficiently specific factual allegations in order to cross
the line between Apossibility@ and Aplausibility@ of entitlement to relief. Id.
There are two Aworking principles@ that apply to Rule 12(b)(6) motions.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). First, courts are not required to
14
accept as true legal conclusions Acouched as factual allegation[s]@ contained in
a complaint. Id. (citing Papasan, 478 U.S. at 286). AThreadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do
not suffice.@ Id. (quoting Twombly, 550 U.S. at 555). Rule 8 Adoes not unlock
the doors of discovery for a plaintiff armed with nothing more than
conclusions.@ Iqbal, 556 U.S. at 678-79.
Second, the plausibility standard is a Acontext-specific task that requires
the reviewing court to draw on its judicial experience and common sense.@ Id.
at 679 (quoting decision below Iqbal v. Hasty, 490 F.3d 143, 157-158 (2d Cir.
2007)). Where the plaintiffs’ allegations are merely conclusory, the court may
not infer more than the mere possibility of misconduct, and the complaint has
allegedBbut has not Ashow[n]@Bthat they are entitled to relief as required by
Rule 8(a)(2). Iqbal, 556 U.S. at 679 (emphasis added).
The Court explained that a reviewing court should begin by identifying
statements in the complaint that are conclusory and therefore not entitled to
the presumption of truth. Id. at 679-680. Legal conclusions must be
supported by factual allegations demonstrating the grounds for a plaintiff=s
entitlement to relief. Id. at 679; Twombly, 550 U.S. at 555; FED. R. CIV. P.
8(a)(2). A court should assume the truth only of Awell-pleaded factual
allegations,@ and then may proceed to determine whether the allegations
Aplausibly give rise to an entitlement to relief.@ Iqbal, 556 U.S. at 679. These
are the principles guiding the court’s evaluation of defendants’ motion.
15
E.
Evidence That May Be Considered To Determine The Defendants’
Motion For Judgment On the Pleadings
In opposing the defendants’ motion for judgment on the pleadings,
counsel for plaintiffs submitted an affidavit (Docket No. 64) with attached
documents which were obtained through discovery. When considering a
motion under either Rule 12(c) or 12(b)(6), however, the court cannot consider
material outside the pleadings unless it is (1) part of the public record, subject
to judicial notice; (2) not contradictory to the complaint; or (3) necessarily
embraced by the pleadings. Pourus Media Corp. v. Pall Corp., 186 F.3d 1077,
1079 (8th Cir. 1999). See also, 5B Charles Allen Wright & Arthur R. Miller,
Federal Practice & Procedure, § 1357 (3d ed.). If the parties present, and the
court considers matters outside the pleadings, the court must give notice to the
parties that it is treating the motion as one for summary judgment under FED.
R. CIV. P. 56 and proceed accordingly. Mattes v. ABC Plastics, Inc.. 323 F.3d
695, 697 n.4 (8th Cir. 2003); FED. R. CIV. P. 12(d).
For the reasons explained in Section (F) below, the court finds the fraud
allegations in plaintiffs’ second amended complaint are stated with sufficient
particularity under FED. R. CIV. P. 9(b). No reference to the materials outside
the pleadings which have been supplied by the plaintiffs is required to make
this determination. The court will not, therefore, convert the defendants’ Rule
12(c) motion for judgment on the pleadings into a motion for summary
judgment under Rule 56. For the same reason, the court refuses to consider
plaintiffs’ proffered affidavit in ruling on defendants’ instant motion.
16
F.
The Plaintiffs Have Sufficiently Alleged Fraud
This case was initially filed in state court, but the defendants removed it
to federal court based upon diversity of citizenship. 28 U.S.C. § 1332; Docket
1. This court therefore applies federal procedural rules, but the substantive
law of South Dakota. See Ashley County, Ark. v. Pfizer, Inc., 552 F.3d 659,
665 (8th Cir. 2009). The court therefore looks to South Dakota law to
determine the necessary elements of fraud which the plaintiffs must adequately
plead under FED. R. CIV. P. 9.
Under South Dakota law, the essential elements of actionable fraud are:
(1) that a representation was made as a statement of fact; (2) which was untrue
and known to be untrue by the party making it, or recklessly made; (3) that the
statement was made with the intent to deceive and for the purpose of inducing
the other party to act upon it; and (4) that the other party did in fact rely on it
and was induced thereby to act to his injury or damage. Stabler v. First State
Bank of Roscoe, 865 N.W.2d 466, 477 (S.D. 2015) (collecting cases).
FED. R. CIV. P. 9 imposes heightened pleading requirements for fraud
claims. The rule requires that a fraud claim “specify the time, place, and
content of the defendant’s false representations, as well as the details of the
defendant’s fraudulent acts.” OmegaGenesis, 851 F.3d at 804 (quoting
Streambend Properties II v. Ivy Tower Mpls., LLC., 781 F.3d 1003, 1013 (8th
Cir. 2015)). Required facts include the “who, what, when, where and how
surrounding the alleged fraud . . . and what was obtained as a result.” Id.
(quoting Quintero Community Association, Inc. v. F.D.I.C., 792 F.3d 1002,
17
1010 (8th Cir. 2015)). The Eighth Circuit has cautioned however, that the
particularity requirement of Rule 9(b) must not mute the general pleading
principles of Rule 8—instead the two rules should be harmonized. Abels, 259
F.3d at 920.
The special nature of fraud does not necessitate anything other
than notice of the claim; it simply necessitates a higher degree of
notice, enabling the defendant to respond specifically, at an early
stage of the case, to potentially damaging allegations of immoral
and criminal conduct. Thus, a plaintiff must specifically allege the
“circumstances constituting fraud,” FED. R. CIV. P. 9(b), including
“such matters as the time, place and contents of false
representations, as well as what was obtained or given up thereby.”
Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982).
Id. With these substantive and procedural requirements in mind, the court
examines the contents of the fraud claims contained within the plaintiffs’
second amended complaint.
The court examines the allegations contained in counts 5 and 8 (the
fraud counts). In count 5, the representations of fact allegedly made by Paul
Thomas were that he would collect and forward to Larson the proceeds received
for the sale of the Aspen Units, to which Larson was entitled. Plaintiffs allege
that, at the time Paul Thomas made these representations, he knew they were
not true, or had reasonable grounds for believing them not to be true.
Plaintiffs further allege Mr. Thomas’s representations regarding the collection
and forwarding of the payment for the Aspen units was made with the intent to
induce Larsen to fund the purchase of the Aspen units, that Larson relied on
Mr. Thomas’s representations in deciding to fund AMHG, LLC’s purchase of the
Aspen units, and that as a result of Mr. Thomas’s deceit, they have been
18
injured in an amount yet unknown. In count 8, the representation of fact
allegedly made by Mr. Thomas was that he intended to perform his and the
Thomas entities’ obligations under the respective contracts, and that they were
able to pay their obligations under those contracts and that the advances
provided by the plaintiffs would be used for modular unit purchases and real
estate development purposes. Plaintiffs allege that Mr. Thomas made these
representations with the intent to induce plaintiffs’ reliance upon them and
that the plaintiffs did in fact rely on them by manufacturing and shipping units
to the Thomas entities without prepayment and by advancing money under the
credit agreement to the Thomas entities. Plaintiffs further allege they suffered
monetary damage as a result of their reliance on Mr. Thomas’s representations.
Under South Dakota law, therefore, the plaintiffs have alleged the necessary
elements of fraud. Stabler, 865 N.W.2d at 477.
Under Rule 9(b), the plaintiffs must also specify the who, what, where,
when and how of the allegedly fraudulent statements. OmegaGenesis, 851
F.3d at 804. To clear this portion of the defendants’ Rule 12(c) hurdle, the
defendants incorporate not only the contents of their fraud counts, but also the
entirety of the second amended complaint. The plaintiffs resist the defendants’
motion by drawing the court’s attention to the following in the second amended
complaint as to the particularity requirements under Rule 9(b) for the fraud
allegations:
Who: plaintiffs identified Paul Thomas as the person making the false
statements. Second amended complaint, Docket 58, ¶¶ 54-56, 76-77.
19
What: plaintiffs alleged the content of the misrepresentations.
Specifically, that Paul Thomas would collect and forward proceeds
received for the sale of the Aspen Units to which Larson was entitled.
Additionally, that Mr. Thomas actually intended to perform their
obligations under the respective contracts and the credit agreement
between the parties, and that advances provided under the credit
agreement would be used for modular home purchases and property
development purposes, and required under the agreement. Second
Amended Complaint, Docket 58, ¶¶ 54, 76.
When: The representations were repeatedly made over the course of
defendants’ dealings with plaintiffs, when requesting advances under the
credit agreement and when he ordered modular units from Superior and
executed amendments to the credit agreement with Larson. This time
span extended at least from April, 2012 through June, 2015. Second
amended complaint, Docket 58, ¶¶ 13-15 , ¶¶ 17-19, ¶¶ 30-31, ¶¶ 3839, ¶¶ 60-65, ¶ 76.
How: Paul Thomas knew his statements were false because, during the
same period of time he was making the statements, Mr. Thomas was
diverting the funds to his own personal use. Second amended complaint,
Docket 58, ¶¶ 15, 20, 49-51. Paul Thomas is the owner and principal of
each of the entity defendants, so he was aware of each of their financial
conditions and how their resources were being used. Second amended
complaint, Docket 58, ¶¶ 4-12. Paul Thomas made his promises with
the intent to induce plaintiffs’ reliance, and plaintiffs did in fact rely on
Mr. Thomas’s statements by advancing millions of dollars under the
credit agreement and for the purchase of modular homes based on
Thomas’s false representations, now in excess of $14 million including
interest and fees. Second amended complaint ¶¶ 57, 68, 78. Superior
built modular units based on Paul Thomas’s representations of which he
now refuses to take delivery. Second amended complaint, Docket 58, ¶¶
21, 32, 40.
The court finds the plaintiffs have met the requirements of Rule 9(b) and
have alleged fraud with sufficient particularity. Though they have not
identified each exact date which Mr. Thomas allegedly made each fraudulent
statement, the plaintiffs have identified the statements to which they refer and
the time frame within which the statements were made with enough
particularity to allow Mr. Thomas to admit or deny whether he made them.
20
Plaintiffs allege the statements were made between April, 2012, and June,
2015, when Mr. Thomas ordered modular units from Superior, when he
executed the credit agreement and amendments thereto with Larson, and when
he requested advances under said agreement. In the context of this case, that
is enough. “Rule 9(b) does not inflexibly dictate adherence to a preordained
checklist of ‘must have’ allegations.” U.S. ex. rel. Heath v. AT & T, Inc., 791
F.3d 112, 126 (D.C. Cir. 2015) (citing Thayer v. Planned Parenthood of the
Heartland, 765 F.3d 914, 918 (8th Cir. 2014)).
The defendants assert plaintiffs’ complaint is insufficient because there
is no allegation that Mr. Thomas knew “any representation was false at any
specific location.” Docket 73, p. 5. The plaintiffs counter that discovery is
ongoing, and they are still uncovering facts to support their fraud claims (i.e. to
pinpoint exactly where all the money was going instead of toward paying for the
Aspen Units and for real estate development and the other purposes for which
Mr. Thomas claimed it was being used under the credit agreement).
Here the court resists the temptation to consider counsel’s affidavit,
which attaches matters outside the pleadings to support the plaintiffs’ claims.
Instead, the court returns to the plaintiffs’ pleadings, which under Rule 12(c),
must be taken as true. The plaintiffs assert in their complaint that throughout
the course of the parties’ relationship, and despite Mr. Thomas’s
representations to the plaintiffs regarding his legitimate intentions for the
plaintiffs’ modular units and extended credit, Mr. Thomas was “diverting to his
own use the proceeds from the sales of the Units” Docket 58, ¶ 15 and that he
21
was “engaged in a scheme to defraud plaintiffs and others involved in the
transactions described in this complaint.” Id. If Mr. Thomas was diverting
proceeds to his own use (as this court must assume to be true under Rule
12(c)), he knew (at the time they were made), that his statements to the
plaintiffs that the proceeds were going to be used for a legitimate business
purpose were false.
To what use Mr. Thomas put the money extended to him under the credit
agreement is a matter, (so far) which is exclusively within Mr. Thomas’
knowledge. As such, the pleading requirements are somewhat relaxed under
Rule 9(b). See e.g. Corley v. Rosewood Care Center, Inc., 142 F.3d 1041, 1051
(7th Cir. 1998) (Rule 9(b) particularity requirement relaxed when the
information needed to plead with particularity was within the hands of the
defendants, who resisted plaintiffs’ attempts to discover it). See also, 5A
Charles A. Wright & Arthur B. Miller, Federal Practice & Procedure, § 1298 (3d
ed.). (“[B]ut the application of [Rule 9(b)] may be relaxed as to matters
peculiarly within the opposing party’s knowledge that the pleader is not privy
to at the time the document is being drafted.”).
For all of these reasons, the court finds the fraud allegations in plaintiffs’
second amended complaint are sufficiently particular under FED. R. CIV. P. 9(b).
CONCLUSION
Accordingly, it is hereby
22
ORDERED that defendants' motion for judgment on the pleadings
regarding plaintiffs’ fraud claims [Docket No. 52] is DENIED.
DATED this 30th day of January, 2018.
BY THE COURT:
VERONICA L. DUFFY
United States Magistrate Judge
23
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?