Rooster's Grill, Inc. v. Peoples Bank & Karen G. Mills

• Decision Date: 11 April 2013
• Docket Number: Civil Action No. 3:12CV757TSL–JMR.
• Citation: 965 F.Supp.2d 770
• Court: U.S. District Court — Southern District of Mississippi
• Parties: ROOSTER'S GRILL, INC., RK Foods, LLC, Reginald Kelly, Individually, and Angela Kelly, Individually, Plaintiffs v. PEOPLES BANK and Karen G. Mills, in her Official Capacity as Administrator of the Small Business Administration, Defendants.

965 F.Supp.2d 770

ROOSTER'S GRILL, INC., RK Foods, LLC, Reginald Kelly, Individually, and Angela Kelly, Individually, Plaintiffs

v.PEOPLES BANK and Karen G. Mills, in her Official Capacity as Administrator of the Small Business Administration, Defendants.

Civil Action No. 3:12CV757TSL–JMR.

United States District Court,

S.D. Mississippi,

Jackson Division.

April 11, 2013.

Carroll H. Ingram, Jennifer Ingram Wilkinson, Ingram & Associates, Allan L. Elkins, Jr., Ingram Wilkinson, PLLC, Hattiesburg, MS, for Plaintiffs.

Laurence Wesley Broadhead, L. Wesley Broadhead, Attorney, Mendenhall, MS, J. William Manuel, Simon T. Bailey, Bradley Arant Boult Cummings LLP, Angela Givens Williams, U.S. Attorney's Office, Jackson, MS, for Defendants.

MEMORANDUM OPINION AND ORDER

TOM S. LEE, District Judge.

This cause is before the court on the motion of defendant Peoples Bank to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs Rooster's Grill, Inc., RK Foods, LLC, Reginald Kelly and Angela Kelly have responded to the motion and the court, having considered the memoranda of authorities submitted by the parties, concludes the motion is well taken and should be granted.

In 2010, Reginald Kelly and Rooster's Grill, Inc. obtained a loan from Peoples Bank (the Bank) for the purpose of opening a restaurant in Collins, Mississippi. Plaintiffs are now in default on the loan and have brought the present action alleging claims against Peoples Bank for breach of the duty of good faith and fair dealing (count I), fraudulent misrepresentation (count II), breach of contract (count III), fraudulent inducement (count IV), breach of fiduciary relationship (count V), breach of confidential duty (count VI), negligence (count VII), and negligent misrepresentation(count VIII) relating to this loan transaction. Each of plaintiffs' claims is based on the factual premise that the Bank extended a loan to them for which they were not qualified and which they could not afford and cannot repay, and on which they are consequently now in default. Plaintiffs have additionally asserted a claim for equitable estoppel (count IX) relating to an earlier unsuccessful attempt by plaintiffs to secure a loan from the Bank. In this count, they allege that they relied to their detriment on a premature oral representation by a Bank loan officer that an earlier loan application by Rooster's had been approved but which they later learned had been denied. Plaintiffs ask that the Bank be estopped from denying the existence of a contract in regard to that earlier loan application. The Bank has moved for dismissal of all these putative claims pursuant to Rule 12(b)(6).

When faced with a Rule 12(b)(6) motion to dismiss, the court must determine whether the plaintiff has asserted a legally sufficient claim for relief. A complaint asserts a legally sufficient claim for relief if it contains “sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks and citation omitted). To meet this threshold of facial plausibility, the complaint's “[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (internal citations omitted). In making this determination, the court is limited to the pleadings and any documents attached thereto, and must accept as true all well-pleaded facts and view them in the light most favorable to the plaintiffs. Great Plains Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 312–13 (5th Cir.2002). Applying this standard to the complaint herein, the court concludes that plaintiffs' allegations do not demonstrate that plaintiffs are entitled to relief. Dismissal is therefore appropriate.

According to plaintiffs' complaint, in 2009, Peoples Bank approved Reginald Kelly and RK Foods, LLC for an $83,057 small business start-up loan for the purpose of acquiring and operating a Fox's Pizza Den restaurant franchise in Collins, Mississippi. Additional loans for $150,000 and $18,763 were made thereafter for the purpose of funding that restaurant. In 2010, Kelly formed Rooster's Grill, Inc. (Rooster's) for the purpose of opening a second restaurant in Collins and applied to the Bank for another small business loan to open the restaurant. Kelly selected a site for the restaurant and began negotiations with the property owner to purchase the property. Plaintiffs allege that in reliance on a representation by a Bank loan officer that the loan application was approved, the property owner evicted his existing tenant so that he could sell the property to Rooster's, and Kelly applied for a liquor license from the State and secured a covenant variation from a neighboring property owner to allow the sale and consumption of alcohol on the premises. Thereafter, however, plaintiffs learned that the loan application had not been approved because the U.S. Small Business Administration had not approved a guarantee for the loan and the Bank would not make the loan without an SBA guarantee.

Plaintiffs allege that because of the apparent denial of the loan, Kelly abandoned the idea of opening a second restaurant altogether until the owners of a local strip mall, Taylor Place, approached him in early 2011 about locating his Rooster's Grill restaurant in the strip mall. Kelly initially responded that given his previous experience with the Bank's approving and then denying his loan application, he was no longer interested in pursuing the project. However, one of the property owners was also an officer with the Bank who was familiar with Kelly's earlier failed attempt to secure a loan, and according to the complaint, this individual assured Kelly that if he agreed to locate his restaurant in the Taylor Place strip mall, Rooster's' application for a small business loan would be approved.

Thus, Kelly, on behalf of Rooster's, applied to the Bank for a loan to open the restaurant in the strip mall. As before, the Bank required an SBA guarantee in order to make the loan; but this time, the SBA approved the Bank's application for a guarantee and Kelly's loan application was approved. Plaintiffs allege, though, that the SBA was induced to approve the Bank's application for a guarantee based on the Bank's misrepresentation to the SBA that neither the Bank nor any of its “associates” (including officers) had any “real or apparent conflict of interest with [Rooster's Grill]” or any “significant direct or indirect financial interest in [Rooster's Grill, Inc.]” or had “such interest within 6 months prior to the date of the application.” ¹ Plaintiffs allege that in fact, contrary to the Bank's representation, at the time of its application for the SBA guarantee, the Bank had knowledge of an actual and direct conflict of interest between the applicant, Rooster's, and the Bank, as an officer of the Bank was a co-owner and developer of the strip mall at which Kelly and Rooster's had agreed to lease space and open the restaurant for business. Plaintiffs allege that as a result of the Bank's misrepresentation to the SBA as to the nonexistence of a conflict of interest, the SBA was induced to approve a small business guarantee ² and in turn, the Bank approved Rooster's' loan application and the loan was executed, secured by Reginald Kelly's personal guarantee and a deed of trust on twenty-two acres of property owned by Reginald and Angela Kelly. Subsequent to the loan closing, Rooster's leased space in the Taylor Place strip mall and the restaurant was opened. However, according to the complaint, the restaurant has not done well and has suffered financial difficulties since its opening, as a result of which Rooster's is currently in default on the loan.

As grounds for each of counts I through VIII in their complaint, plaintiffs allege the following: that the Bank would not approve Rooster's' loan application unless the Bank could obtain an SBA guarantee for the loan; that the Bank could only obtain an SBA guarantee for the loan if it certified the nonexistence of any conflict of interest between the Bank and the prospectiveborrower; that the Bank was aware that a conflict of interest in fact existed, which rendered the proposed loan ineligible for an SBA guarantee; that the Bank nevertheless misrepresented to the SBA that there was no conflict of interest; and that as a result, the SBA approved the Bank's application for a guarantee and the Bank, in turn, approved Rooster's' loan application. In addition to alleging that the Bank's misrepresentation to the SBA made it possible for them to obtain the loan, plaintiffs allege that the Bank falsely represented to Kelly/Rooster's that Rooster's was eligible for an SBA-guaranteed loan and thereby “intentionally created a false impression in [Kelly's] mind that he would be able to afford the loan ultimately approved,” and that this induced Kelly/Rooster's to enter into a loan agreement with the Bank. According to plaintiffs, had they known the loan for which Kelly/Rooster's had applied was not eligible for an SBA guarantee, they would not have entered the loan agreement and thus would not have suffered the resulting financial harm.

To the extent plaintiffs' claims may be based on an allegation that the Bank's misrepresentation to the SBA provides a basis for the SBA to void its guarantee for the loan, plaintiffs' allegations do not support their claims for relief. To understand why, one need only consider the purpose of an SBA guarantee in an SBA-guaranteed loan. Unlike a direct SBA loan or an immediate participation loan by a lender and the SBA, an SBA-guaranteed loan is one in which the SBA is not a lender but rather guarantees a portion of a loan...