Midwest Commerce Banking Co. v. Elkhart City Centre

• Decision Date: 09 September 1993
• Docket Number: No. 92-2966,92-2966
• Citation: 4 F.3d 521
• Parties: MIDWEST COMMERCE BANKING COMPANY, Plaintiff-Counter-Defendant, Appellee, v. ELKHART CITY CENTRE, Defendant-Counter-Plaintiff-Third-Party-Plaintiff, Appellant, v. James V. WOODSMALL; Warrick, Weaver & Boyn; and Marla Unger, Third-Party-Defendants, Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 521

4 F.3d 521

26 Fed.R.Serv.3d 1426

MIDWEST COMMERCE BANKING COMPANY, Plaintiff-Counter-Defendant, Appellee, v. ELKHART CITY CENTRE, Defendant-Counter-Plaintiff-Third-Party-Plaintiff, Appellant, v. James V. WOODSMALL; Warrick, Weaver & Boyn; and Marla

Unger, Third-Party-Defendants, Appellees.

No. 92-2966.

United States Court of Appeals Seventh Circuit.

Argued April 2, 1993.

Decided Sept. 9, 1993.

Paul E. Becher (argued), Karla O. Boresi, Barnes & Thornburg, Elkhart, IN, Daniel F. Gosch, Detroit, MI, for Midwest Commerce Banking Co.

Joseph C. Niebler (argued), Scott J. Hutchison, Niebler & Muren, Brookfield, WI, for Elkhart City Centre.

G. Ronald Heath, Ronald G. Sentman, Johnson, Smith, Densborn, Wright & Heath, Indianapolis, IN, for James V. Woodsmall and Warrick, Weaver & Boyn.

Paul E. Becher, Karla O. Boresi, Barnes & Thornburg, Elkhart, IN, William I. Kohn, Michael B. Watkins, Barnes & Thornburg, South Bend, IN, for Marla Unger.

Before POSNER and EASTERBROOK, Circuit Judges, and TIMBERS, Senior Circuit Judge. ^*

POSNER, Circuit Judge.

A bankrupt partnership, Elkhart City Centre, appeals the dismissal, for failure to plead fraud with the particularity required by Fed.R.Civ.P. 9(b), of its common law fraud action against a bank (Midwest Commerce) and a law firm (Warrick, Weaver & Boyn). There is more to the case but nothing else that bears on our decision. The defendants argue that if we disagree with the district judge's pleading ground we should decide the case in their favor on the merits. We do, and shall. Reed v. AMAX Coal Co., 971 F.2d 1295, 1298 (7th Cir.1992) (per curiam).

In 1979 Elkhart had borrowed $4.8 million in a deal orchestrated by the defendant bank to develop a hotel and convention center in Elkhart, Indiana. The loan was secured by bonds issued by Elkhart. By 1982 Elkhart was in default and that year it negotiated with the bank an amended loan agreement under which the bondholders, for whom the bank was acting as trustee, agreed to forgive the default. The agreement recited that it would take effect only if all the bondholders signed it. One of them, Henkin, for unexplained reasons did not sign. Elkhart's lawyer requested from the bank written confirmation that all the bondholders had signed. The bank failed to mail the confirmation until 1990. Yet in 1982 Elkhart, even though it had not obtained the written confirmation, had represented to several investors to whom it sold limited partnerships in order to raise more capital that the revised loan agreement was in effect. Elkhart claims that the bank knew that Henkin had not signed the agreement but concealed this knowledge from Elkhart in a "cover up" that culminated when in 1990 Henkin finally signed the 1982 revised agreement but without dating his signature, so that it looked as if he had signed it back in 1982. The defendant law firm is alleged to have participated in the fraud by failing from 1982 to 1990 to tell Elkhart that Henkin had not signed.

Eventually Elkhart defaulted once again and this time declared bankruptcy, listing the limited partners as creditors who had claims that Elkhart would not dispute. The limited partners had filed no proofs of claim in bankruptcy against Elkhart and made no demands upon Elkhart for payment, but not much significance can be attached to these facts; having been listed by the debtor as creditors with undisputed claims, the limited partners were not required to file proofs of claim. 11 U.S.C. Secs. 521(1), 1111(a).

The district judge should not have dismissed the entire suit on the basis of Rule 9(b). In particular he should not have allowed the defendant law firm to persuade him that the complaint had to allege not only that the firm had failed to reveal Henkin's failure to sign to Elkhart but also that it had had a duty to make such a disclosure to Elkhart. Rule 9(b) does not require that the complaint explain the plaintiff's theory of the case, but only that it state the misrepresentation, omission, or other action or inaction that the plaintiff claims was fraudulent. DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990); see also Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 682-83 (7th Cir.1992). The plaintiff's theory of the case is tested by a motion to dismiss for failure to state a claim (Rule 12(b)(6)), in which the law firm could have argued that since it had no duty to disclose Henkin's failure to sign, Elkhart had no claim against it.

The complaint adequately alleges the fact that the law firm had failed to reveal that Henkin had not signed the revised loan agreement and the time period during which that failure deceived Elkhart. Whether the failure is actionable may or may not depend on whether the law firm had a duty--other than the duty everyone has to avoid deliberately making misleading statements or omissions--to disclose a fact that, the law firm argues, was as accessible to Elkhart as to the firm. The firm points out that it had no fiduciary relationship with Elkhart. It was the bank's lawyer rather than Elkhart's and the bank as an imperiled creditor was the adversary of its debtor. All Rule 9(b) required, however, was that Elkhart set forth the date and content of the statements or omissions that it claimed to be fraudulent. Elkhart was not required to go further and allege the facts necessary to show that the alleged fraud was actionable. Uni*Quality v. Infotronx, 974 F.2d 918, 923 (7th Cir.1992); Bankers Trust Co. v. Old Republic Ins. Co., supra, 959 F.2d at 683-84. That might entail allegations about the parties' relationship, given the (dubious) suggestion that the fraud here may have consisted in the abuse of a relationship that created a duty to speak--the wrong that is sometimes called "constructive fraud," Hardy v. South Bend Sash & Door Co., 603 N.E.2d 895, 901 (Ind.App.1992); Block v. Lake Mortgage Co., 601 N.E.2d 449, 451 (Ind.App.1992); it would certainly entail allegations demonstrating the falsity of any representations or omissions, Elkhart's reliance on the defendant's misrepresentations or omissions, and the reasonableness of that reliance. None of that was required.

The defendants, moving from procedure to substance, also are wrong to argue that omissions are actionable only if a defendant has a duty to the plaintiff that arises from a fiduciary or other special relationship. Omissions are actionable as implied representations when the circumstances are such that a failure to communicate a fact induces a belief in its opposite. Kelley v. Fisk, 110 Ind. 552, 11 N.E. 453, 454 (1887); Peoples Trust & Savings Bank v. Humphrey, 451 N.E.2d 1104, 1112 (Ind.App.1983); McNair v. Public Savings Ins. Co., 88 Ind.App. 386, 163 N.E. 290, 293-94 (1928); Vaughn v. General Foods Corp., 797 F.2d 1403, 1414 (7th Cir.1986) (applying Indiana law); Central States Stamping Co. v. Terminal Equipment Co., 727 F.2d 1405, 1409 (6th Cir.1984); United States Fidelity & Guaranty Co. v. Black, 412 Mich. 99, 313 N.W.2d 77, 89 (1981) (a case factually much like this one). The circumstances include a situation such as this where the omitted fact (that a necessary signature had not been obtained) is basic to the transaction, so that if the nondiscloser treats the transaction as valid the other party will naturally assume that all its conditions have been fulfilled. Restatement (Second) of Torts Sec. 551(e); Crum v. AVCO Financial Services of Indianapolis, Inc., 552 N.E.2d 823, 830 n. 6 (Ind.App.1990).

The defendants have, however, a sound ground for defending the judgment dismissing the suit. There can be no tort without an injury (at least a threatened injury, if prospective relief is being sought, but that is not an issue here). Niehus v. Liberio, 973 F.2d 526, 531-32 (7th Cir.1992). What this means in a fraud case is that the plaintiff must show that, had it not been for the fraud, he would have been spared an injury and thus would be better off. Stromberger v. 3M Co., 990 F.2d 974, 976-78 (7th Cir.1993). He must compare the situation in which he found himself after the fraud to the situation he would have been in had there been no fraud. The fraud alleged here is the concealment of the fact that Henkin had failed to sign the revised loan agreement in 1982. We...