Haney v. Castle Meadows, Inc.

• Decision Date: 30 November 1993
• Docket Number: Civ. A. No. 93-K-322.
• Citation: 839 F. Supp. 753
• Parties: Franklin L. HANEY, an individual, d/b/a The Franklin L. Haney Company, a sole proprietorship, Plaintiff, v. CASTLE MEADOWS, INC., a California corporation, Resolution Trust Corporation, in its capacity as Receiver for Lincoln Savings and Loan Association, F.A., Resolution Trust Corporation, in its Corporate capacity, Resolution Trust Corporation, Defendants.
• Court: U.S. District Court — District of Colorado

839 F. Supp. 753

Franklin L. HANEY, an individual, d/b/a The Franklin L. Haney Company, a sole proprietorship, Plaintiff, v. CASTLE MEADOWS, INC., a California corporation, Resolution Trust Corporation, in its capacity as Receiver for Lincoln Savings and Loan Association, F.A., Resolution Trust Corporation, in its Corporate capacity, Resolution Trust Corporation, Defendants.

Civ. A. No. 93-K-322.

United States District Court, D. Colorado.

November 30, 1993.

John H. Bernstein, Tana K. Simard, Kutak Rock, Denver, CO.

Lisa Hogan, Robert C. Troyer, Brownstein, Hyatt, et al. Denver, CO.

Ann E. Hopfenbeck, Powers Phillips, et al. Denver, CO.

Joseph P. Martinez, Denver, CO.

ORDER ON MOTIONS TO DISMISS

KANE, Senior District Judge.

This matter is before me on the separate motions to dismiss by defendants Castle Meadows, Inc. ("CMI"), the Resolution Trust Corporation in its corporate capacity ("RTC Corporate") and the Resolution Trust Corporation in its capacity as receiver of the Lincoln Savings and Loan Association, F.A. ("RTC Receiver"). Each defendant asserts separate reasons why the complaint, or certain claims therein, should be dismissed. For the reasons outlined below, I grant CMI's motion to dismiss in part and deny it in part, grant RTC Corporate's motion to dismiss, and deny RTC Receiver's motion to dismiss for lack of subject matter jurisdiction and motion to dismiss and/or strike claims for rescission and exemplary damages.

I. Background.

Haney's claims arise out of a failed real estate transaction in which Haney had contracted to purchase a parcel of land commonly referred to as "the Meadows" from CMI and RTC Receiver.¹ On November 7, 1991, Haney, CMI and RTC Receiver entered into a purchase agreement (the "1991 Agreement"). Haney agreed to purchase the Meadows and related general obligation bonds for $54 million dollars. Under the 1991 Agreement, Haney paid a non-refundable fee of $750,000 and a downpayment of $1,250,000. For reasons not explained in the complaint, that agreement was never consummated.

In December, 1992, the parties entered into a second purchase and sale agreement for the property (the "1992 Agreement"). Under the 1992 Agreement, the price for the property dropped to $29 million dollars. Haney again paid a non-refundable fee, this time of $290,000, and a downpayment of $1,160,000.

Shortly before the January 26, 1993 closing date, Haney learned from a third party that a well on the property (the "A-6 Well") was contaminated by significant levels of radioactive compounds. CMI did not disclose this problem to Haney, despite the fact that the A-6 Well was shown as part of the water source for the Meadows. Upon learning of the contamination of the A-6 Well, Haney gave CMI notice that he was terminating both the 1991 and 1992 Agreements and requested a refund of the amounts he had prepaid to date. CMI refused to acknowledge rescission of the Agreements or to refund these sums. After the notice of rescission, Haney learned that at least one Federal Emergency Management Agency (FEMA) floodplain ran through the Meadows property.

On February 9, 1993, Haney commenced this diversity action against CMI. Both the 1991 and 1992 Agreements were attached to and incorporated by reference into the complaint.² On March 9, 1993, he amended his complaint, naming RTC Receiver and RTC Corporate as additional defendants. Haney alleges the following six claims against CMI: (1) fraudulent misrepresentation relating to the A-6 Well contamination, (2) negligent misrepresentation relating to the A-6 Well contamination, (3) fraudulent misrepresentation relating to the existence of one or more FEMA floodplains, (4) negligent misrepresentation relating to the existence of one or more FEMA floodplains, (5) breach of contract as to both the 1991 and 1992 Agreements and (6) outrageous conduct. Only the breach of contract claim is alleged against RTC Receiver and RTC Corporate. Haney voluntarily dismissed a seventh claim for injunctive relief.

On March 9, 1993, Haney moved for a temporary restraining order and for prejudgment attachment of CMI's assets under Colo. R.Civ.P. 102. I denied these motions. See Haney v. Castle Meadows, Inc., 816 F.Supp. 655 (D.Colo.1993). On April 26, 1993, the defendants filed the instant motions to dismiss. CMI argues that Haney's negligent misrepresentation claims are insufficient as a matter of law, that contract language in the 1991 and 1992 Agreements precludes his fraudulent misrepresention claims, and the allegations fail to support a claim for outrageous conduct. RTC Corporate argues that it is not a proper defendant in this lawsuit because it had no involvement in the transactions at issue. Finally, RTC Receiver argues that Haney must exhaust his administrative remedies before proceeding against it and that federal law bars Haney's claims for rescission and punitive damages.

In considering these motions to dismiss, I accept the allegations as true and construe them in the light most favorable to Haney. See Williams v. Meese, 926 F.2d 994, 997 (10th Cir.1991). Dismissal of Haney's claims is proper only if he can prove no set of facts in support of his claims to entitle him to relief. Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984); Boone v. Carlsbad Bancorporation, Inc., 972 F.2d 1545, 1551 (10th Cir.1992).

II. Merits.

A. CMI's Motion to Dismiss.

CMI makes three arguments in its motion to dismiss. First, relying on Burman v. Richmond Homes Limited, 821 P.2d 913 (Colo.App.1991), CMI asserts that Haney cannot as a matter of law state a claim for negligent misrepresentation based on CMI's failure to disclose information about the A-6 Well and FEMA floodplains, Haney's second and fourth claims for relief. Under CMI's interpretation of Burman, a claim for negligent misrepresentation can only be based on the actual communication of information, not the failure to communicate. In other words, CMI maintains, there is no tort in Colorado for negligent concealment.

In Burman, the Colorado Court of Appeals upheld the trial court's order granting summary judgment against the plaintiffs, purchasers of real property, on their claims for negligent misrepresentation against the vendors, brokers and a title company. After the plaintiffs closed on the property, they learned that it was included within a general improvement district and thus subject to additional taxes. As to the vendor and the title company, the court held that the plaintiffs had failed to allege that these defendants had supplied false information, a necessary element of a claim for negligent misrepresentation. See id. at 919, 921.

In Burman, the information not disclosed was the existence of a general improvement district. The court rejected the plaintiffs' contention that in that case the vendor had a duty, under Cohen v. Vivian, 141 Colo. 443, 349 P.2d 366 (1960), to disclose this condition because it was not a latent one involving a physical defect as in Cohen. But unlike Burman, this case does involve allegedly latent conditions: a radioactive well and one or more floodplains. See Schnell v. Gustofson, 638 P.2d 850, 851-52 (Colo.App.1981) (radioactive mine tailings under home a latent condition which the vendor had duty to disclose); Robbins v. Marchant, 1 Ark.App. 211, 616 S.W.2d 736, 737 (1981) (sellers liable to purchasers for damages by failing to disclose that property lay in a floodplain); Klott v. Associates Real Estate, 41 Ohio App.2d 118, 122, 322 N.E.2d 690, 693 (1974) (contaminated well an example of a dangerous latent defect in property). Thus, the question here is whether a vendor can be held liable for negligence in failing to disclose these conditions. Neither CMI nor Haney adequately address this question.

My review of Colorado law and the law of similar jurisdictions leads me to conclude that a claim for negligent concealment is a legal impossibility in the vendor/purchaser context. In contrast to cases involving an affirmative misstatement or misrepresentation as to the condition of property, in which a seller's knowledge of the condition is generally irrelevant, when concealment of a latent condition is relied upon, "knowledge of the facts by the party who is claimed wrongfully to have withheld information is essential, in order to affect the validity of the sale." 91 C.J.S. Vendor and Purchaser § 67 at 939 (1955). Likewise as explained in Cohen, the seller's duty to disclose in Colorado rests on the fact that the seller has knowledge of a latent defect:

We are here dealing with a latent condition from the standpoint of the purchasers. It became the equivalent of a patent condition to the sellers by virtue of the discovery that it was filled ground. A latent soil defect, known to the seller of a house built on such soil, creates a duty of disclosure in the seller. His failure to disclose amounts to concealment, making him vulnerable to a suit based in fraud.

349 P.2d at 367; see also Restatement of Torts (Second) § 551 (1977) (liability for nondisclosure requires that the nondisclosing party know of a fact that may justifiably influence another's actions).

Thus, because the seller's knowledge of the condition is an essential element of a claim based on concealment, the case becomes one sounding in fraud, not negligence. See Brewer v. Brothers, 82 Ohio App.3d 148, 152-53, 611 N.E.2d 492, 494-95 (1992); Smith v. Renaut, 387 Pa.Super. 299, 564 A.2d 188, 193 (1989) (fraud in vendor/purchaser context arises where there is knowledge and concealment of condition). Therefore, I conclude, as have other courts, that there is no tort for negligent concealment in the vendor/purchaser context. See also Taggart v. Ford Motor Credit Co., 462 N.W.2d 493, 504 (S.D.1990) ("Although South Dakota recognizes actions for negligent misrepresentation, there is no cause of action for negligent nondisclosure."); Nelson v. Cheney, 224 Neb. 756, 401 N.W.2d 472, 476 (1987) (...