Real Estate Financing v. Resolution Trust Corp.

Citation950 F.2d 1540
Decision Date15 January 1992
Docket NumberNo. 90-7880,90-7880
PartiesREAL ESTATE FINANCING, Plaintiff-Appellant, v. RESOLUTION TRUST CORPORATION; Investment Group Mortgage Corporation; Union Planters Investment Bankers Group, Inc.; Defendants-Appellees. Non-Argument Calendar. United States Court of Appeals, Eleventh Circuit
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Jesse M. Williams, III, Dennis R. Bailey, Montgomery, Ala., for plaintiff-appellant.

Richard H. Gill, Copeland, Franco, Screws & Gill, P.A., Montgomery, Ala., for Union Planters.

Robert L. Crawford, Thomas J. Walsh, Jr., McDonnell Boyd, Memphis, Tenn., for Investment Group Mortg. Corp. & Union Planters.

Betsy P. Collins, Spain, Gillon, Grooms, Blan & Nettles, Birmingham, Ala., for Resolution Trust Corp.

Appeal from the United States District Court for the Middle District of Alabama.

Before KRAVITCH, ANDERSON and BIRCH, Circuit Judges.


This diversity case involves a commercial transaction--specifically, a sale of mortgages. The seller, First Guaranty Mortgage Corporation ("First Guaranty"), a wholly owned subsidiary of Resolution Trust Corporation as receiver for First Guaranty Bank for Savings ("Bank") (collectively, "seller"), promoted a mortgage servicing offering through a reputable broker, Investment Group Mortgage Company ("Investment Group"), an affiliate of Union Planters Investment Bankers Group, Inc. ("Union Planters") (collectively, "broker"). The broker's offering contained an important error: it described the fees a buyer could expect to receive from servicing the mortgages as "net" of the fees the buyer must pay to insure the mortgages, when in fact the expected servicing fees listed in the offering were "gross" figures. In other words, a party relying upon the information in the offering would mistakenly believe that it could make more money servicing the mortgages than it actually would.

The eventual buyer of the mortgages, Real Estate Financing, Inc. ("REF" or "buyer"), belatedly discovered the error after signing a sales contract. The buyer then sued the seller and the broker for fraud under Alabama law. The United States District Court for the Middle District of Alabama granted summary judgment in favor of all the defendants. Our independent review of the district court's decision discloses no error in the dismissal of REF's intentional fraud count. However, largely because of recent changes in Alabama's law of fraud, we do find error in the district court's dismissal of the fraud counts which do not require intent to deceive. Therefore, we AFFIRM in part, REVERSE in part, and REMAND the case to the district court for further proceedings consistent with this opinion.

A. The Relevant Facts

In early December 1988, Investment Group distributed the mortgage servicing offering on behalf of First Guaranty and the Bank. Joe Wilson, an executive vice-president of REF with six years of experience in buying and selling mortgage portfolios, received the offering and elected to bid on the mortgages. Using a computer program to analyze the relevant data (including the erroneous information on the expected servicing fees), Wilson determined that his company should bid 2.3% of the outstanding balance of the mortgages. Wilson then called Union Planters and was told that his 2.3% bid was "in the ballpark." R1-14-8.

By letter to Investment Group, Wilson submitted the 2.3% bid in mid-December, specifically qualifying it by stating that it was subject to REF's verification of the information in the offering and REF's due diligence review prior to signing any sales contract. Wilson's conditions were reasonable, as it is common in this industry for buyers of mortgages to check all figures before entering into any contractual relationships. To verify the information, REF requested and received Forms 2010 for each of the mortgage pools it wanted to buy. These forms contained accurate information about the mortgages offered by the seller, including the expected gross servicing fee and the required insurance guaranty fee for each mortgage pool.

A mathematical analysis of the Forms 2010 would have alerted REF to the fact that the offering mischaracterized the expected servicing fees as net figures and not gross figures. Despite REF's express indication that it would diligently review the relevant data and despite possessing the time, information, and business acumen to perform the necessary calculations, REF's "verification" failed to discover the error. REF admittedly did not do its homework before it purchased the mortgages. Not until many months later did REF discover the mistake and sue the seller and the broker for fraud.

B. The Proceedings Below

REF filed its complaint in November 1989. The complaint asserted three counts under Alabama law: (1) willful deception, (2) reckless misrepresentation, and (3) innocent misrepresentation. The defendants filed motions to dismiss, which were treated by the district court as motions for summary judgment. The parties briefed the motions and submitted affidavits and other evidence to the district court. After hearing oral argument on the motions, the district court granted summary judgment in favor of the seller and the broker on February 26, 1990.

The district court's decision primarily rested on two grounds. First, the court believed that there was no evidence tending to show that either the seller or the broker intentionally deceived REF, an essential element of willful deception. Second, the court concluded that there was no genuine dispute regarding REF's justifiable reliance upon the figures in the mortgage servicing offering, also a requisite element for finding fraud under Alabama law. Therefore, the district court granted summary judgment in favor of the seller and the broker. After REF's motion to amend its complaint to add different claims was denied by the district court, REF appealed.

A. The Standards Governing Summary Judgment

A district court must grant summary judgment if the moving party shows that there is no genuine dispute regarding any material fact and it is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Fed.R.Civ.P. 56(c). One way to seek an award of summary judgment is for the moving party to demonstrate that an essential element of the non-movant's case is lacking. Celotex, 477 U.S. at 325, 106 S.Ct. at 2554. After such a showing, unless the non-moving party offers proof sufficient to establish the existence of the essential element, the district court must grant summary judgment to the moving party. Id. at 322-23, 106 S.Ct. at 2552. Because our review of a district court's summary judgment decision is de novo, we independently review the record, following the same standards that guide a district court. See, e.g., Hinesville Bank v. Pony Express Courier Corp., 868 F.2d 1532, 1534 (11th Cir.1989).

B. Willful Deception

Under Alabama law, an essential element of willful deception is "[k]nowledge of the falsehood with intent to deceive...." Kaye v. Pawnee Constr. Co., 680 F.2d 1360, 1369 (11th Cir.1982) (interpreting Alabama law). REF's argument for intentional deception rests upon the following scenario. Either First Guaranty or Investment Group intentionally described gross figures as net figures in the offering, hoping to entice a buyer to bid substantially higher for the mortgages. The offering was then distributed to many sophisticated business entities, even though all were very capable of discovering the fraud, in order to attract many inflated bids. When the highest bidder was ascertained, the seller and the broker would provide that party with accurate information about the mortgages (Forms 2010). The villains would then hope that this bidder would not perform the simple arithmetic which would defeat the scheme, despite knowing that it is standard industry practice for mortgage buyers to check all figures diligently. Such a scenario is perhaps conceivable, but not very plausible. Under such circumstances, a party alleging intentional fraud would need solid proof to withstand summary judgment. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); Goldberg v. Household Bank, F.S.B., 890 F.2d 965, 967 (7th Cir.1989).

Not only did the district court fail to find persuasive evidence to support REF's allegations of intentional fraud, it failed to find any evidence to support those allegations. Our independent review of the record also fails to disclose any evidence which would indicate that either the seller or the broker intentionally misrepresented the mortgage servicing fees in order to deceive REF. In fact, all of the evidence negates such a finding. Statements by the defendants uniformly characterize the error as honest and innocent. The defendants willingly admitted the mistake soon after Wilson told them of the error. Moreover, the internal projections of the broker, calculated to judge the adequacy of the bids, utilized the same erroneous information which Wilson plugged into his computer program. There is no genuine dispute about material facts here. The defendants made an error, but did not engage in willful fraud in order to deceive REF. Because "the record taken as a whole could not lead a rational trier of fact to find for [REF]," the district court correctly granted summary judgment in favor of the defendants on REF's willful deception count. Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356.

C. Reckless And Innocent Misrepresentation

The fact that a deceptive statement was not made intentionally does not mean it is not fraud. Under Alabama law, one can defraud even without an intent to deceive. See First Ala. Bank v. First State Ins. Co., 899 F.2d 1045, 1056 (11th Cir.1990) (reviewing Alabama law). Therefore, REF's reckless and innocent misrepresentation counts survive unless those counts are...

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