Scott v. Durham
| Decision Date | 03 January 2011 |
| Docket Number | No. 1:09-CV-348-PPS-RBC,1:09-CV-348-PPS-RBC |
| Court | U.S. District Court — Northern District of Indiana |
| Parties | JAMES F. SCOTT, et al, Plaintiffs, v. TIMOTHY S. DURHAM, et al., Defendants. |
This matter is before the Court on two motions to dismiss relating to third-party claims asserted by defendant Auburn Automotive Heritage, Inc. (the "Museum"). One motion was filed by third-party defendants Donald Lyons, Joan Lyons and the Donald Lyons Family Trust (for simplicity, I will refer to these entities collectively as "Lyons") [DE 144]; the other was filed by third-party defendants Mark Hyman and Hyman Properties, Inc. d/b/a Hyman Limited Classic Cars ("Hyman") [DE 145]. For the reasons discussed below, the Court GRANTS the motions to dismiss, albeit without prejudice to the Museum's ability to amend its claims against the moving parties.
BACKGROUND
Plaintiff James Scott sued several parties involved in the Museum's auction of a 1930 Duesenberg automobile, which Scott alleges was rigged, resulting in his paying an artificially inflated price for the car [DE 1]. One of the defendants in Scott's original complaint is the Museum. The Museum responded by bringing the third-party actions described above. According to the Museum, defendant Timothy Durham, the car's original owner, initiallyconsigned the Duesenberg to the Museum for the auction.1 Subsequently, Hyman, acting as an agent for Donald Lyons, contacted Durham, who agreed to sell the car for $1 million, notwithstanding Durham's prior consignment agreement. By the terms of the Durham/Lyons scheme, Lyons agreed that Hyman would attend the auction on Lyons' behalf, and be the highest bidder on the car. But whatever the amount of that bid, Lyons would only be obligated to pay Durham $1 million for the car.
Hyman submitted a bidder registration form to the Museum in advance of the auction, which did not reveal anything about Lyons' purchase agreement with Durham. Hyman then attended the auction and bid on the car on behalf of Lyons. Once the bidding reached roughly $800,000, all bids were between Hyman and Scott. Scott was bidding via telephone. Hyman, however, backed out of the agreement to place the highest bid, leaving Scott as the highest bidder at $2.9 million. Scott paid this amount, along with an additional $232,000, to the Museum, for a total of $3,132, 000. Pursuant to the illicit Durham/Lyons agreement, $1,000, 000 of the sale proceeds went to Durham, and Lyons and Hyman each received $950,000.
At issue in the pending motions to dismiss are the Museum's claims against Lyons and Hyman for actual fraud (Count I), negligence (Count IV) and violation of the Indiana Crime Victims Relief Act ("CVRA"), IC § 34-24-3-1 (Count VI) [DE 128]. In support of its actual fraud count, the Museum alleges that Lyons and Hyman defrauded the Museum by failing to disclose their ownership interest in the car [DE 128, ¶¶ 39-44]. The Museum's negligence claim is based on its contention that the Indiana Administrative Code imposed on Lyons and Hyman a duty to disclose this ownership interest, which those parties breached [Id, ¶¶ 60-63]. As for its CVRA claim, the Museum alleges that Lyons' and Hyman's actions caused the Museum to suffer pecuniary losses, through violations of Indiana's deception and criminal mischief statutes, thereby triggering the CVRA's remedies for such violations [Id, ¶¶ 73-79].
Lyons and Hyman seek to dismiss these claims, pursuant to Rule 12(b)(6), essentially arguing that each claim requires the existence of a duty to disclose an ownership interest in the car, which they say the Museum cannot show.
DISCUSSION
A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the complaint, not the merits of the case. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In reviewing a motion to dismiss under Rule 12(b)(6), the Court must take the facts alleged in the pleading as true and draw all reasonable inferences in favor of the pleader. The pleading must contain only "a short and plain statement of the claim showing that the pleader is entitled to relief, " Fed. R. Civ. P. 8(a)(2), and there is no need for detailed factual allegations. The statement, however, must "give the defendant fair notice of what the... claim is and the grounds upon which it rests" and the "[f]actual allegations must be enough to raise a right to relief above the speculative level." Pisciotta v. Old Nat. Bancorp, 499 F.3d 629, 633 (7th Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
The failure of Lyons and Hyman to disclose an ownership interest in the car is the sole deceptive act supporting the Museum's fraud claim against those parties. The Museum, however, does not point to any special feature of its relationship with Lyons and Hyman that would give rise to a duty to disclose such information. In the absence of such a duty, the Museum's claims for actual fraud against these parties fail.
Under Indiana law, the elements of actual fraud are: "(i) material misrepresentation of past or existing facts by the party to be charged (ii) which was false (iii) which was made with knowledge or reckless ignorance of the falseness (iv) [which] was relied upon by the complaining party and (v) [which] proximately caused the complaining party injury." Rice v. Strunk, 670 N.E.2d 1280, 1289 (Ind. 1996); see also Kesling v. Kesling, 546 F. Supp. 2d 627, 638 (N.D. Ind. 2008); Lawyers Title Ins. Corp. v. Pokraka, 595 N.E.2d 244, 249 (Ind. 1992).
These elements expressly require a misrepresentation. But Indiana law also recognizes that "the failure to disclose all material facts, by a party on whom the law imposes a duty to disclose, constitutes actionable fraud." Vaughn v. General Foods Corp., 797 F.2d 1403, 1413-14 (7th Cir. 1986) (quoting Grow v. Indiana Retired Teachers Cmty., 271 N.E.2d 140, 145 (Ind. 1971) (en banc)); see also Kesling, 546 F. Supp. 2d at 639; Indiana Bank & Trust Co. v. Perry, 467 N.E.2d 428, 431 (Ind. Ct. App. 1984) ().
But "where there is no duty to speak or disclose facts, silence will not constitute actionable fraud." Monarch Beverage Co., Inc. v. Tyfield Importers, Inc., 823 F.2d 1187, 119192 (7th Cir. 1987) (quoting Barnd v. Borst, 431 N.E.2d 161, 168 (Ind. Ct. App. 1982)). Moreover, "the burden of showing a duty to speak is on the party alleging fraudulent concealment." Id.
For purposes of actual fraud, a duty to disclose may arise by virtue of a fiduciary or confidential relationship. See Kesling, 546 F. Supp. 2d at 641; Grow, 271 N.E.2d at 143; Am. United Life Ins. Co. v. Douglas, 808 N.E.2d 690, 701 (Ind. Ct. App. 2004); Wells v. Stone City Bank, 691 N.E.2d 1246, 1251 (Ind. Ct. App. 1998). It may also arise in the context of a buyer-seller relationship. See Kesling, 546 F. Supp. 2d at 638; Am. United Life Ins., 808 N.E.2d at 701; Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind. Ct. App. 1994).
The Museum does not allege that it stood in a fiduciary, confidential, or buyer-seller relationship with Lyons and Hyman. Instead, it argues that a duty to disclose arose here from: (1) the "superior knowledge" of Lyons and Hyman as to their ownership interest in the car; (2) those parties' partial disclosures to the Museum by means of Hyman's bidder registration form; and (3) Section 1-1-34(d) of the Indiana Administrative Code, which is an administrative regulation governing the operation of auction houses [DE 161 at 7-8]. None of these arguments, however, is persuasive.
The Museum correctly observes that a duty to disclose can sometimes arise where one party enjoys a position of superiority over another by virtue of knowledge that only it possesses. But the cases that find a duty to disclose arising on this basis have done so in only narrow circumstances, and almost exclusively in the context of buyer-seller relationships. See Kesling, 546 F. Supp. 2d at 638; Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind. Ct. App. 1994); but see Am. United Life Ins., 808 N.E.2d at 701 () (citing Wells v. Stone City Bank, 691 N.E.2d 1246, 1251 (Ind. Ct. App. 1998)).
And even in a buyer-seller context, a duty to disclose does not necessarily arise. See Am. Heritage Banco, Inc. v. Cranston, 928 N.E.2d 239, 247 (Ind. Ct. App. 2010) ().
Cases that find a duty to disclose arising from one party's superior knowledge reason that the duty arises from the trust and reliance that one party must repose in the other. See Am. Heritage Banco, 928 N.E.2d at 247 (); Scott v. Bodor, Inc., 571 N.E.2d 313, 324 (Ind. Ct. App. 1991) (); Peoples Trust and Sav. Bank v. Humphrey, 451 N.E.2d 1104, 1111 (Ind. Ct. App. 1983) () (quoting McNair v. Public Sav. Ins. Co. of America, 163 N.E. 290, 293 (Ind. Ct. App. 1928)); see also Wells, 691 N.E.2d at 1251 ().
The Museum does not allege that it was required to place its trust and reliance on Hyman or Lyons. Nor does it characterize its relationship with those parties in a way that would permit an...
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