American Realty Trust v. Travelers Cas. and Sur.

• Decision Date: 30 March 2005
• Docket Number: No. CIV.A.3:04-CV-1602-N.,CIV.A.3:04-CV-1602-N.
• Parties: AMERICAN REALTY TRUST, INC. and AMERICAN REALTY INVESTORS, INC., Plaintiffs, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA and LOCKTON INSURANCE AGENCY OF DALLAS, INC., Defendants.
• Court: U.S. District Court — Northern District of Texas

362 F.Supp.2d 744

AMERICAN REALTY TRUST, INC. and AMERICAN REALTY INVESTORS, INC., Plaintiffs, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA and LOCKTON INSURANCE AGENCY OF DALLAS, INC., Defendants.

No. CIV.A.3:04-CV-1602-N.

United States District Court, N.D. Texas, Dallas Division.

March 30, 2005.

COPYRIGHT MATERIAL OMITTED

John F. Redwine, Redwine Law Offices, Mitchell Madden, Law Offices of Mitchell Madden, Dallas, TX, for Plaintiffs.

Donald Frederick Campbell, Dallas, TX, for Defendants.

MEMORANDUM OPINION AND ORDER

GODBEY, District Judge.

Before the Court is Defendants' Motion to Dismiss, filed on July 30, 2004. That motion is granted. Plaintiffs concede that their claims for breach of fiduciary duty, Texas insurance code violation, and fraud do not satisfy the pleading requirements of the Federal Rules of Civil Procedure. The Court concludes that Plaintiffs' breach of contract and declaratory judgment claims are also subject to dismissal. Additionally, the parties raise a question of law concerning the applicability of Federal Rule of Civil Procedure 9(b)'s heightened pleading requirement to negligent misrepresentation claims. The Court holds that under Fifth Circuit precedent, a negligent misrepresentation claim is not subject to the heightened pleading requirements of Rule 9(b) simply because it is based on operative facts that also form the basis of fraud claims. Nonetheless, Plaintiffs' negligent misrepresentation claim is dismissed, because it is intertwined with Plaintiffs' fraud claim in the Petition, such that the Court cannot describe a simple redaction that removes only the fraud claim.

I. BACKGROUND

Plaintiff American Realty Investors, Inc. ("ARI") is the 100% parent corporation of Plaintiff American Realty Trust ("ART"). On September 16, 2002, the United States District Court for the Northern District of Texas, the Honorable A. Joe Fish presiding, entered a monetary judgment against ART. American Realty Trust, et al. v. Matisse Capital, et al., No. 3:00-cv-01801-G. In connection with an appeal of this judgment, ART obtained two supersedeas bonds — in the amounts of $6,030,036.28 and $1,395,000 — from Defendant Travelers Casualty and Surety Company of America ("Travelers"). Plaintiffs allege that Defendant Lockton Companies, Inc. ("Lockton") acted as Traveler's agent in arranging for these bonds. Although the bonds were executed for the benefit of ART, Travelers required parent company ARI to execute the indemnity agreement and to provide collateral in the form of cash deposits with a third party in the amount of the bonds.

Plaintiffs maintain that the cash deposits were meant as a potentially temporary form of collateral. According to Plaintiffs' petition, Travelers and Lockton represented to Plaintiffs prior to and at the issuance of the bonds "that they would accept an irrevocable letter of credit issued by a mutually acceptable bank as a substitute collateral for the cash deposits" and that the cash deposits would be "promptly released" should Plaintiffs provide such a letter of credit. Plaintiffs further allege that after the parties had identified a mutually acceptable bank and arranged for the letter of credit, Travellers imposed a "last minute" condition on the release of the cash deposits. This condition — that Travelers would retain control over the cash deposits for 90 days to allow a preference period to expire for potential bankruptcy purposes — would have forced Plaintiffs to provide collateral for the letter of credit before receiving the cash deposits back. Plaintiffs claim that because they were unwilling to redundantly collateralize the supersedeas bonds, they were forced to locate a substitute bonding company. This they did, and in consequence they had to pay additional bond premiums.

Plaintiffs further allege that when they communicated to Travelers their intent to obtain a substitute bond, Travelers assured them that "Travelers could and would promptly consent to the return of the cash deposits." This assurance was allegedly repeated after Travelers obtained the substitute bond and a court order approving substitution. Plaintiffs allege, however, that Travelers then imposed another last minute condition on the release of the cash deposits, namely that Travelers would not release the cash deposits until an appeal period expired for the substitution order. Plaintiffs dispute the legal necessity of any such condition.

When Travelers eventually did release the cash deposits, Plaintiffs allege that Travelers illegitimately withheld some of the funds. According to the Petition, Travelers' grounds for doing so were to offset unrelated debts and possibly to cover attorneys fees related to disputes over the supersedeas bonds.

Plaintiffs originally filed suit in state court, alleging claims against Travelers for (1) fraud and negligent misrepresentation, (2) breach of fiduciary duty, (3) breach of contract, (4) declaratory judgment to the effect that Plaintiffs are entitled to a refund of their bond premiums and return of the cash deposits in their entirety, and (5) violation of TEX. INS. CODE ART. 21.21 § 2(a). Plaintiffs also sought contractual and statutorily authorized attorney's fees, as well as a declaratory judgment to the effect that Lockton acted as Travelers' agent in connection with the supersedeas bonds. Defendants removed to this Court and filed the present motion, which seeks dismissal of all claims.

II. MOTION TO DISMISS STANDARD

A complaint should not be dismissed for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Courts must accept a plaintiff's factual allegations as true. Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir.1982). However, dismissal is proper "if the complaint lacks an allegation regarding a required element necessary to obtain relief," Apani Southwest, Inc. v. Coca-Cola Enterprises, Inc., 300 F.3d 620, 624 (5th Cir.2002) (citation omitted), or if it otherwise fails to give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests. Conley, 355 U.S. at 47, 78 S.Ct. 99.

III. THE MOTION TO DISMISS IS GRANTED AS TO THE BREACH OF FIDUCIARY DUTY, INSURANCE CODE, AND FRAUD CLAIMS

Plaintiffs' Response indicates that "[a]fter reviewing Defendants' motion, support brief and authorities, Plaintiffs agree that there is not a cause of action for breach of fiduciary duty or for violation of the Insurance Code." The Court accepts this joint conclusion of the parties. Accordingly, the motion to dismiss is granted as to these two claims. Plaintiffs also agree that their fraud claim, originally drafted for state court, does not meet the stringent requirements of FED. R. CIV. P. 9(b).¹ Although Defendants argue the claim should be dismissed with prejudice because Plaintiffs did not satisfy Rule 9(b) in their Response, the Court is unaware of any such requirement. Accordingly, Plaintiffs' fraud claim is dismissed without prejudice and Plaintiffs are granted leave to amend.

IV. PLAINTIFF'S NEGLIGENT MISREPRESENTATION CLAIM IS DISMISSED WITHOUT PREJUDICE

A. Applicable Fifth Circuit Standard

Defendants additionally argue that the heightened pleading requirements of Rule 9(b) apply to Plaintiffs' negligent misrepresentation claim, and that this claim as well fails to meet these requirements. Defendants acknowledge that negligent misrepresentation claims are generally not subject to Rule 9(b), but argue that they become subject to the Rule when based on misrepresentations that are also alleged to be fraudulent. This argument is based on the following passage from Benchmark Electronics, Inc. v. J.M. Huber Corporation, 343 F.3d 719 (5th Cir.), modified on denial of rehearing, 355 F.3d 356 (2003):

Although Rule 9(b) by its terms does not apply to negligent misrepresentation claims, this court has applied the heightened pleading requirements when the parties have not urged a separate focus on the negligent misrepresentation claims. Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.1997). That is the case here, as Benchmark's fraud and negligent misrepresentation claims are based on the same set of alleged facts.

343 F.3d at 723. Defendants glean from this passage that "Rule 9(b) applies to negligent misrepresentation claims that are based on the same set of alleged facts as the plaintiffs' fraud claims." They note that Plaintiffs pled fraud and negligent misprepresentation as a single "Cause of Action" arising out of a single series of events, and therefore propose that Defendants must specify the who, what, when, where and how of their negligent misrepresentation claim.

Defendants are not alone in advocating this view of the law. Similarly situated defendants routinely argue to this Court that Rule 9(b) applies to negligent misrepresentation and other causes of action that share some but not all elements of fraud. There is some authority on their side. E.g. Frith v. Guardian Life Insurance Co., 9 F.Supp.2d 734, 742 (S.D.Tex.1998) ("Claims alleging violations of the Texas Insurance Code and the DTPA and those asserting fraud, fraudulent inducement, fraudulent concealment, and negligent misrepresentation are subject to the requirements of Rule 9(b)."). Moreover, the language of Benchmark Electronics is amenable to Defendants' interpretation. An unpublished decision of the Northern District of Texas recently summarized Benchmark Electronics and Williams as holding that Rule 9(b) applies "when the claim for negligent misrepresentation arises from the same set of operative facts as a corresponding claim of fraud." Daldav Associates v. Lebor, 2004 WL 728367 (N.D.Tex.2004).

Based on a review of relevant precedents, however, the Court...