Rabo Agrifinance v. Bliss et al
MEMORANDUM DECISION granting 25 Motion to Dismiss for Failure to State a Claim. The Clerk of Court is directed to dismiss this action with prejudice as against J & S Financial Corporation, Stephen L. Adamson, and Jared Adamson. Signed by Judge Clark Waddoups on 1/4/17. (jmr)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH CENTRAL DIVISION
RABO AGRIFINANCE, INC.,
MEMORANDUM DECISION AND
ORDER GRANTING MOTION TO
MICHAEL R. BLISS, TIMOTHY S. BLISS,
JUSTIN H. BLISS, J & S FINANCIAL
CORPORATION, STEPHEN L. ADAMSON,
and JARED ADAMSON,
Case No. 2:15-cv-00418
Judge Clark Waddoups
This matter is before the court on a Motion to Dismiss brought by defendants J & S
Financial Corporation, Stephen L. Adamson, and Jared Adamson (the J & S Defendants) under
Federal Rule of Civil Procedure 12(b)(6). (Dkt. No. 25.) A hearing on this motion was held on
October 13, 2016, at which time the court took the matter under advisement. The court has
carefully considered the memoranda and other materials submitted by the parties, the arguments
of counsel, and the law and facts relating to the motion. For the reasons discussed below, the
court GRANTS the Motion to Dismiss.
Plaintiff Rabo Agrifinance, Inc. (Rabo) is a Delaware corporation with its principal place
of business in St. Louis, Missouri. (Am. Compl. ¶ 1, Dkt. No. 20.) All defendants reside within
the state of Utah for the purposes of 28 U.S.C. § 1332(a). (Id. at ¶¶ 2-10.) This court has
diversity jurisdiction over the subject matter of this action pursuant to 28 U.S.C. § 1332(a),
because there is complete diversity between the adversarial parties, and the matter in controversy
before the court exceeds $75,000.
On January 6, 2012, Rabo made a loan of $11,944,494.53 to three dairies owned by the
Bliss family: Revolution Dairy, Highline Dairy, and Robert and Judith Bliss dba Bliss Dairy
(collectively, the Borrowers). (Id. ¶¶ 15-17.) The Borrowers hired the J & S Defendants as
financial consultants to help them obtain financing for their dairies. (Id. at ¶ 35.) In deciding to
fund the loan for the dairies, Rabo alleges that it relied on the Borrowers’ written financial
information for the years 2008 through 2011 as sent to them by the J & S Defendants. (See id. at
After the loan was funded, Rabo alleges that it discovered the financial information it
received about the Borrowers was inaccurate. Rabo alleges it received three fraudulent pieces of
information: (1) a June 30, 2011 financial statement, (2) a December 1, 2011 borrowing base
report (Base Report), and (3) a December 31, 2011 Base Report. (Id. at ¶¶ 68-70.)
Rabo alleges the following, which the court accepts as true for purposes of the Motion to
Dismiss: In the December 1, 2011 Base Report, the Borrowers represented that the accounts
payable for the dairies as of December 1, 2011 was $98,474. (Id. at ¶ 41.) In the December 31,
2011 Base Report, the Borrowers represented to Rabo that the dairies’ total net accounts payable
as of December 31, 2011 was $749,282. (Id. at ¶ 44.) On January 6, 2012, Rabo, relying on the
Base Reports, closed and funded the loan to the Borrowers. (See id. at ¶¶ 42-45.)
On April 17, 2012, Rabo received the Borrowers’ 2011 financial statement that was
prepared by an independent accounting firm and was intended to report on the dairies’ financial
condition as of December 31, 2011. (Id. at ¶ 48.) The 2011 Financial Statement should have been
entirely, or at least materially consistent with the December 31, 2011 Base Report. However, it
was not. (Id. at ¶ 49.) Among other things, the 2011 financial statement revealed that the
Borrowers had underreported their accounts payable by over $2.5 million. (Id. at ¶¶ 52-53.)
On May 2, 2012, Rabo sent the J & S Defendants an email asking for an explanation
from both the Borrowers and the J & S Defendants of the reasons for the substantial and material
discrepancies between the December 31, 2011 Base Report and the 2011 Financial Statement.
(Id. at ¶ 50.) This suit was filed on June 12, 2015. (See Dkt. No. 1.) By Rabo’s own admission it
had observed “substantial and material discrepancies between the December 31, 2011 Base
Report and the 2011 Financial Statement on May 2, 2012. (Am. Compl. ¶ 50, Dkt. No. 20.)
As time progressed, Rabo continued to discover the full extent of the fraud. After further
investigation Rabo became aware that the accounts payable was more than $8 million, which
was significantly higher than the $98,474 that was originally represented. (Id. at ¶ 57.) Rabo’s
further investigation also revealed that the Borrowers had suffered a loss in 2011 of over $3.5
million, which was materially different from the profit of $813,000 the Borrowers originally
represented. (Id. at ¶¶ 58-60.)
Rabo seeks recovery from the J & S Defendants for (1) Common Law Fraud, (2)
Fraudulent Non-Disclosure, (3) Negligent Misrepresentation, (4) Aiding and Abetting Fraud, and
(5) Conspiracy. The J & S Defendants filed this Motion to Dismiss asserting that Rabo’s fraud
claims are barred by the three-year statute of limitations, and that Rabo failed to adequately
allege a negligent misrepresentation claim due to the fact that the J & S Defendants did not owe
Rabo an independent duty outside of contract law.
The court will first address the reasons why Rabo’s fraud claims are barred by the statute
of limitations, and then will discuss the reasons why the J & S Defendants, as financial
consultants to the Borrowers, did not owe Rabo an independent duty to refrain from negligent
misrepresentations in the preparation or delivery of a third party’s financial statements.
1. Statute of Limitations for Claims Grounded in Fraud
Utah Code § 78B-2-305(3) provides for a three year statute of limitations for relief on the
ground of fraud or mistake. The Utah Supreme Court has held the three year statute of
limitations applies to all common law claims that are grounded in fraud. See Hill v. Allred, 28
P.3d 1271, 1276 (Utah 2001). All of Rabo’s causes of action other than its negligent
misrepresentation claim are grounded in fraud because all of these causes of action allege the
same underlying theory that Rabo was fraudulently induced to enter into the loan. Therefore
Rabo’s claims for Common Law Fraud, Fraudulent Non-Disclosure, Aiding and Abetting
Fraud, 1 and Conspiracy 2 are subject to the three-year statute of limitations period set forth in
Utah Code § 78B-2-305(3) because all of these causes of action are grounded in fraud.
a. Statute of Limitations Begins Upon Actual or Inquiry Notice of Fraud
As a general rule, a statute of limitations begins to run “upon the happening of the last
event necessary to complete the cause of action.” Russell/Packard Development, Inc. v. Carson,
108 P.3d 741, 746 (Utah 2005). Damages is an essential element in order to bring a cause of
action for fraud. Dugan v. Jones, 615 P.2d 1239, 1246 (Utah 1980). It is not necessary, however,
for a “plaintiff to know the full extent of his injuries before the statute of limitations begins to
run.” Indus. Constructors Corp. v. U.S. Bureau of Reclamation, 15 F.3d 963, 969 (10th Cir.
Utah courts have not yet recognized a claim for aiding and abetting fraud. Nevertheless, the court need
not reach the question of whether Utah Courts would recognize such a claim because even if the claim
were recognized it would be barred by the statute of limitations.
Even if the claim for conspiracy to commit fraud was subject to a longer statute of limitations, the claim
would still be barred because a claim for conspiracy to commit fraud is not a stand-alone cause of action.
A party may not bring a civil conspiracy to commit fraud claim without also bringing the underlying
fraud claim, which is barred here by the statute of limitations. Corles v. Sabey, 79 P.3d 974, 983 (Utah
1994). Utah courts adhere to the “benefit of the bargain rule” for determining damages in a fraud
case. See Lamb v. Bangart, 525 P.2d 602 (Utah 1984). This means that “in an action for fraud
and deceit the measure of damages is the difference between the actual value of what the party
received and the value thereof if it had been as represented.” Id. at 609. “A plaintiff is deemed to
have discovered his action when he has actual knowledge of the fraud, or by reasonable diligence
and inquiry should know the relevant facts of the fraud perpetrated against him.” Colosimo v.
Roman Catholic Bishop of Salt Lake City, 156 P.3d 806, 811 (Utah 2007) (internal quotations
Rabo was defrauded upon entering into the misrepresented loan with the Borrowers.
Rabo’s fraud causes of action, however, could not have been successfully brought until Rabo had
become aware that it was damaged. Rabo had actual knowledge that it was defrauded when it
received Borrowers’ 2011 Financial Statement on April 17, 2012. On May 2, 2012, Rabo sent
the J & S Defendants an email asking for an explanation from the Borrowers and the J & S
Defendants of the reasons for the substantial and material discrepancies between the December
31, 2011 Base Report and the 2011 Financial Statement. Because Rabo admits it became aware
of the substantial and material discrepancies at least by May 2, 2012, the court can be certain that
the final necessary element of damages for its fraud claim was met on May 2, 2012 due to the
fact that Rabo had actual knowledge of fraud at this date. (See Am. Compl. ¶ 50, Dkt. No. 20.)
Rabo contends that its claims should not be barred by the statute of limitations because it
was not damaged until the dairies defaulted on their loan by filing for bankruptcy on January 27,
2013. This argument runs counter to Utah law and sound public policy. Utah law is clear that the
statute of limitations begins upon the happening of the last event necessary to bring the cause of
action. Colosimo, 156 P.3d at 810. Rabo cannot succeed on its theory that the statute of
limitations did not begin until the Borrowers defaulted unless it can show that at no time before
the default of the loan could it have successfully brought a cause of action for fraud. As
discussed earlier, Utah law provides a remedy for fraud before the fraudulently induced loan
enters default. See Lamb, 525 P.2d 602. Remedies before default include rescission or the
expectation damages of the value of now having an inferior loan. Because Rabo could have
successfully brought a claim for common law fraud on May 2, 2012, the statute of limitations
began on this day.
b. Delayed Discovery of Extent of Fraud Does Not Toll Statute of Limitations
Rabo further argues that it did not know the full extent of its damages on May 2, 2012.
Rabo claims the statute of limitations for its fraud claims should start after May 2, 2012 because
its damages got continually worse the more it investigated. Delayed discovery of the full extent
of damages, however, does not toll the statute of limitations.
A “plaintiff need not know the full extent of his injuries before the statute of limitations
begins to run.” See Indus. Constructors Corp., 15 F.3d at 969. Courts have explained that “where
the injury, although slight, is sustained . . . the statute of limitations attaches at once . . . The
running of the statute of limitations is not postponed by the fact that the actual or substantial
damages do not occur until a later date.” See Louisiana-Pac. Corp. v. ASARCO Inc., 24 F.3d
1565, 1580-81 (9th Cir. 1994) (quoting Steele v. Organon, Inc., 716 P.2d 920, 922 (Wash. App.
Rabo was damaged for purposes of the statute of limitations by at least May 2, 2012,
when it acknowledged it uncovered substantial and material discrepancies of over $2.5 million in
accounts payable compared to what was originally represented. Because there was a remedy of
either rescission or damages available on May 2, 2012, it does not matter that Rabo became
aware of additional damages as time went on. Rabo’s fraud claims were filed on June 12, 2015,
which was more than three years after the statute of limitations began on May 2, 2012, and
therefore all of Rabo’s fraud causes of action are untimely. Rabo’s claims for Common Law
Fraud, Fraudulent Non-Disclosure, Aiding and Abetting Fraud, and Conspiracy are therefore
dismissed with prejudice.
2. Rabo’s Negligent Misrepresentation Claim is Timely, but Fails as a Matter of Law
Under Utah law a claim for negligent misrepresentation is subject to a four year statute of
limitations. DOIT, Inc. v. Touche, Ross & Co, 936 P.2d 835 (Utah 1996). Because Rabo was
damaged on May 2, 2012, and filed suit on June 12, 2015, Rabo’s claim for negligent
misrepresentation is within the statute of limitations.
Raising a timely claim, however, does not prevent the claim from failing as a matter of
law because the J & S Defendants, acting as financial consultants, did not owe Rabo an
independent duty outside of contract law. In order to have a successful cause of action for
negligent misrepresentation, the plaintiff has the burden to prove the defendant owed an
independent duty of care that is separate from a contractual obligation. See Davencourt at
Pilgrims Landing Homeowners Ass’n v. Davencourt at Pilgrims Landing, 221 P.3d 234 (Utah
Rabo alleges that the J & S Defendants, as financial consultants, owed Rabo an
independent duty of care in preparing the Borrowers’ Base Reports and in not making negligent
representations about the Borrowers’ financial status. As support for this duty, Rabo cites
Milliner v. Elmer Fox and Co., 529 P.2d 806 (Utah 1974), which stated that an accountant may
have a duty to a third party lender in the preparation of financial statements when he or she
knows the lender may rely upon the accountant’s opinion. Rabo fails to cite a comparable case
where this duty has been applied to a financial consultant, but argues nonetheless that this duty
should be extended to financial consultants.
Imposing a duty on certified public accountants to third party lenders is appropriate
because they hold themselves out as verifying the accuracy of financial statements. The
statement in Milliner recognizing a duty by accountants to third parties was driven by the
expectation that accountants should reasonably understand that some users of a financial
statement prepared by an accountant for the corporation would rely upon the accountant having
certified its accuracy. Id. at 808.
Financial consultants such as the J & S Defendants, however, have a fundamentally
different role. The J & S Defendants held themselves out as financial consultants principally
responsible for securing loans by matching borrowers and lenders. Their role was much more
akin to brokers than accountants. Imposing a duty on financial consultants such as the J & S
Defendants to verify the accuracy of a borrower’s financial statements would fundamentally
change the nature of their role, and Rabo failed to point the court to any support for imposing
such a duty. Although the J & S Defendants could arguably have owed an independent duty to
their clients, the Borrowers, the court finds no support for the proposition that they owed an
independent duty to third party lenders. 3
Rabo has failed to establish that the J & S Defendants, as financial consultants, owed
Rabo an independent duty outside of contract law to refrain from negligent misrepresentations.
Rabo’s claim for negligent misrepresentation must therefore be dismissed.
This is not to say there is no cause of action for fraud to obtain a remedy against a financial consultant
who falsifies financial statements, but that is not at issue here. A negligent misrepresentation cause of
action, on the other hand, is for just that, negligence. As the law currently stands, a third party is not
justified in relying on financial statements that were created or passed on by a third party that is not
ordinarily in the business of verifying financial statements.
For the foregoing reasons, the court GRANTS the defendant’s Motion to Dismiss for
failure to state a claim. (Dkt. No. 25.) The Clerk of Court is directed to dismiss this action with
prejudice as against J & S Financial Corporation, Stephen L. Adamson, and Jared Adamson.
DATED this 4th day of January, 2017.
BY THE COURT:
United States District Court Judge
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