Schaaf v. Residential Funding Corp.

• Citation: 517 F.3d 544
• Decision Date: 22 February 2008
• Docket Number: No. 06-3694.,06-3694.
• Parties: Vernon SCHAAF; Julian Boik; Alfred Streufert, on behalf of themselves and others similarly situated, Plaintiffs/Appellants, v. RESIDENTIAL FUNDING CORPORATION; Heller Financial, Inc., Defendants/Appellees, Marshall & Isley Bank, Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

517 F.3d 544

Vernon SCHAAF; Julian Boik; Alfred Streufert, on behalf of themselves and others similarly situated, Plaintiffs/Appellants, v. RESIDENTIAL FUNDING CORPORATION; Heller Financial, Inc., Defendants/Appellees, Marshall & Isley Bank, Defendant.

No. 06-3694.

United States Court of Appeals, Eighth Circuit.

Submitted: April 12, 2007.

Filed: February 22, 2008.

Vernon Jay VanderWeide, argued, Minneapolis, MN, Thomas V. Seifert, Minneapolis, MN, and JOhn A. Cochrane, St Paul, MN, on the brief, for appellant.

Larry Dale Espel, argued, Monte A. Mills, on the brief, Minneapolis, MN, for appellee Heller.

James K. Langdon, II, argued, Andrew J. Heller, on the brief, Minneapolis, MN, for appellee Residential Funding.

Before WOLLMAN, BEAM, and COLLOTON, Circuit Judges.

COLLOTON, Circuit Judge.

Investors Vernon Schaaf, Julian Boik, and Alfred Streufert appeal the district court's¹ dismissal of their claims against Residential Funding Corporation (RFC) and Heller Financial, Inc. The district court concluded that the investors failed to plead a sufficient causal nexus between their financial losses and the allegedly fraudulent actions of RFC and Heller. Alternatively, the district court rejected the investors' common law fraud claims because they failed to allege reliance, and dismissed their claims under the Minnesota Consumer Fraud Act (MCFA) because those claims did not seek to secure a public benefit. We affirm based on the first ground.

I.

We recite the facts according the allegations of the investors' complaint. In November 1997, United Homes, Inc., issued debentures worth about $7,000,000, which paid 11 % annual interest. According to the offering's prospectus, United intended to use the proceeds to pay off a $2.6 million line of credit bearing an interest rate of 25%, while using the remainder to pay off debt to Heller (which bore a rate of 9.4% on June 30, 1997) and RFC (9.75% on June 30, 1997). Before allowing United to proceed with the offering, the Securities and Exchange Commission (SEC) required United to disclose in its prospectus the amount of its debt to Heller and RFC, and whether United was in compliance with the terms of this debt. Without contacting either lender to confirm that it actually was in compliance, United modified the prospectus to indicate its supposed compliance with the terms of its indebtedness to Heller and RFC. Several weeks later, United requested lenders' certificates from Heller and RFC indicating that United was in compliance with the terms of its debt.

On November 14, 1997, the SEC declared United's prospectus "effective," meaning that the offering's underwriter could begin selling the securities. See 15 U.S.C. § 77e. After the prospectus was deemed effective, but before United had hired an underwriter, RFC and Heller provided certificates indicating that United was not in default. The plaintiffs allege that both certificates were fraudulent because United had triggered defaults by violating its debt-to-worth covenant with each lender.

A day after receiving the lenders' certificates, United entered into an underwriting agreement with Miller & Schroeder Financial (M & S). The underwriting agreement required United to represent to M & S that neither United nor any subsidiary of United was "in default with respect to any provision of any ... loan agreement ... to which it [was] a party or by which it may be bound." After receiving this assurance, M & S went ahead with the offering. The investors allege that M & S would not have proceeded had it known that United was in violation of its debt-toworth covenants with its lenders. They also allege that Heller and RFC recognized that M & S would rely on the lenders' certificates. The plaintiffs maintain that if M & S had refused to proceed with the offering, then the plaintiffs could not have purchased the securities and would not have suffered the ensuing financial losses.

The offering began on November 25, 1997, and extended into 1998. The plaintiffs purchased debentures in November and December 1997 based on M & S's oral representations that the debentures were "worthy investments for investors seeking income investments." Each plaintiff received a prospectus along with his purchase.

In April 1998, Heller declared United in default of its credit agreement for failing to comply with the agreement's reporting requirements. This declaration terminated United's revolving line of credit with Heller.

On November 16, 1998, RFC informed United that United had violated the loan agreement's debt-to-worth requirement, the same covenant that the plaintiffs allege was the subject of the fraudulent lenders' certificates. For a short time, United and RFC amended the loan agreement to remedy the default. In February 1999, however, RFC declared that United's loans were "presently in default and accordingly RFC is entitled to withhold further disbursement and to exercise its rights and remedies under the Loan Documents." Citing a "severe cash flow shortage" at United, RFC sought to extricate itself from the relationship. Still, RFC did not foreclose on its collateral at this point. It held out hope that United could improve its financial position by selling off assets or issuing equity. Later, in June 1999, when United requested RFC's permission to pay interest on the debentures using RFC's funds, RFC refused, declaring that it would allow United to use its RFC credit line only to fund expenses that would "directly result in the completion of partially built houses forming part of [RFC's] collateral." On February 8, 2000, RFC foreclosed on its loans to United, writing that "Events of Default are numerous and include, but are certainly not limited to, the fact that interest on the loans has not been paid since December, 1998."

The source of United's "severe cash flow shortage" was the poor performance of some of its business ventures. In the fall of 1998, United failed to sell as many homes as anticipated. In this period, "United's Arizona activities ... performed poorly ... due to a number of local factors including specific project locations, zoning issues, and personnel issues." These business failures cascaded because of United's heavy debt load. When United's creditors refused to advance new lines of credit, United was doomed to insolvency. On March 9, 2000, after a credit line with National City Bank finally dried up, United filed its petition for bankruptcy, making the debentures worthless.

The plaintiffs first sued M & S under the federal Securities Act of 1933, 15 U.S.C. §§ 77k, 771, and the Minnesota Securities Act, Minn.Stat. § 80A.40 et seq. In that suit, the state trial court refused to certify a class proposed by the plaintiffs and M & S later declared bankruptcy. The plaintiffs commenced this suit in state court against Heller and RFC, asserting violations of the MCFA and claims of common law fraud and unjust enrichment. Heller and RFC removed the case to the district court, which dismissed the plaintiffs' claims. The district court adopted the report and recommendation of a magistrate judge, which concluded that the plaintiffs had failed to plead a sufficient causal nexus between their injuries and the allegedly fraudulent lenders' certificates. Alternatively, the district court concluded that the plaintiffs' MCFA claims did not satisfy the statute's requirement that such claims seek to secure a "public. benefit." The court also rejected plaintiffs' common law fraud claims on the ground that they had failed to allege that they relied on Heller and RFC's fraudulent lenders' certificates.

II.

On appeal, the investors argue that the district court erred in dismissing their claims on the ground that they failed to allege loss causation in their complaint. In addition, they maintain that their MCFA claim provided sufficient public benefit to satisfy the requirements of the statute, and that they adequately alleged reliance for their common law fraud claims. The investors also appeal the district court's dismissal of their aiding and abetting claims against Heller and RFC, as well as the court's dismissal of their claim against Heller for unjust enrichment.

A.

We review the district court's grant of a motion to dismiss de novo. In re Canadian Import Antitrust Litig., 470 F.3d 785, 788 (8th Cir.2006). Dismissal is proper where the plaintiffs' complaint fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). At this stage of the litigation, we accept as true all of the factual allegations contained in the complaint, and review the complaint to determine whether its allegations show that the pleader is entitled to relief. Bell Atlantic Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007); Fed.R.Civ.P. 8(a)(2). The plaintiffs need not provide specific facts in support of their allegations, Erickson v. Pardus, ___ U.S. ___, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007) (per curiam), but they must include sufficient factual information to provide the "grounds" on which the claim rests, and to raise a right to relief above a speculative level. Twombly, 127 S.Ct. at 1964-65 & n. 3. The complaint must "provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind." Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 347, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). Otherwise, a plaintiff with no hope of showing proximate causation could require inefficient expenditure of resources and potentially induce a defendant to settle a meritless claim. Id.

To prevail on a tort claim, a plaintiff must show that the defendant's tortious actions caused the plaintiffs losses. W. Page Keeton et al., Prosser and Keeton on Torts § 41 (5th ed.1984). When ruling on a motion to dismiss, we look to whether the plaintiffs' allegations suffice to show the required causal connection between the defendant's wrongful conduct and the plaintiffs' losses. Du...