Sunset Financial Resource v. Redevelopment Group V

• Decision Date: 24 February 2006
• Docket Number: Civil Action No. 05-2914.,Civil Action No. 05-2915.
• Citation: Sunset Financial Resource v. Redevelopment Group V, 417 F.Supp.2d 632 (D. N.J. 2006)
• Parties: SUNSET FINANCIAL RESOURCES, INC., Plaintiff, v. REDEVELOPMENT GROUP V, LLC et al., Defendants.
• Court: U.S. District Court — District of New Jersey

417 F.Supp.2d 632

SUNSET FINANCIAL RESOURCES, INC., Plaintiff, v. REDEVELOPMENT GROUP V, LLC et al., Defendants.

Civil Action No. 05-2914.

Civil Action No. 05-2915.

United States District Court, D. New Jersey.

February 24, 2006.

COPYRIGHT MATERIAL OMITTED

Alison L. Galer, Norris, McLaughlin & Marcus, P.C., Somervile, NJ, and Jaimee Katz Sussner, Herrick, Feinstein LLP, Newark, NJ, for Plaintiff.

Thomas A. Cunniff, Samuel H. Isreal, James Griffith, Fox Rothschild LLP, Lawrenceville, NJ, for Defendants Redevelopment Group V, LLC and Dawn Staley.

Stephen J. Defeo, Brown & Connery, LLP, Westmont, NJ, for Third-party Defendants Sunset Commercial Group, LLC, Sunset Mortgage Company, L.P. and Steven Forman.

Gregory C. Dicarlo, Cipriani & Werner, P.C., Marlton, NJ, for Third-party Defendants Flynn Appraisal Associates, Inc. and Brian Flynn.

OPINION

SIMANDLE, District Judge.

TABLE OF CONTENTS
                I. BACKGROUND ........................................................... 636
                       A. Origins of the Alleged Scheme to Defraud Defendants ............... 636
                       B. Representations Regarding the Status of the Coliseum .............. 637
                       C. The Role of Flynn Appraisal Associates, Inc. and Brian Flynn ...... 637
                       D. The Events of August 4, 2004—The Purported Closing Date ........... 638
                   II. PROCEDURAL HISTORY ................................................... 639
                  III. PLAINTIFF'S MOTION AND DEFENDANTS' CROSS-MOTION FOR
                        LEAVE TO AMEND ...................................................... 640
                

A. Legal Standard for Motions for Leave to Amend ..................... 640
                       B. Application to Plaintiffs Motion for Leave to Amend and
                           Defendants' Cross—Motion to Amend ................................ 640
                          1. Plaintiff's Motion for Leave to Amend .......................... 640
                          2. Defendants' Cross—Motion to Amend .............................. 641
                   IV. THIRD-PARTY DEFENDANTS' MOTIONS TO DISMISS ........................... 641
                       A. Legal Standard for a Motion to Dismiss ............................ 642
                       B. Defendants' Fraud-based Claims .................................... 643
                          1. Pleading Standards Under Fed.R.Civ.P. 9(b) ..................... 643
                          2. Whether Defendants' Allegations of Fraud are Properly Pled ..... 644
                          3. Whether Defendants have Sufficiently Plead Fraud Allegations
                              Made "Upon Information and Belief" ............................ 645
                       C. Defendants' Negligence-based Claims ............................... 647
                          1. Arguments Made by Both the Sunset and Flynn Defendants ......... 647
                          2. Additional Arguments Made by the Flynn Defendants .............. 648
                          3. The Court's Analysis ........................................... 648
                       D. Defendants' Claim of Conversion ................................... 649
                       E. Defendants' Claim of Breach of the Covenant of Good Faith and Fair
                          Dealing ........................................................... 650
                    V. CONCLUSION ........................................................... 651
                

On the surface, the matter presently before the court appears quite straightforward: A mortgage lender (Plaintiff, Sunset Financial Resources, Inc.) files suit to foreclose on a mortgaged property and sues the borrower (Defendant Dawn Staley and her investment vehicle, Redevelopment Group V, LLC) on the underlying note. However, scratching the surface reveals that this matter is much more complex, involving claims by the borrower of fraud, negligence, conversion, conspiracy, forgery and other acts of numerous individuals and entities (including a mortgage broker, an appraiser, a title company and a law firm, among others) who allegedly worked in concert to fraudulently induce Staley to purchase an outdated and dilapidated sports facility and sign a personal guaranty before eventually converting a portion of the funds she provided for use as a down payment on the facility.

Currently before the Court are the following four motions: (1) Plaintiff Sunset Financial Resources Inc.'s motion for leave to amend its original Complaint; (2) Defendants Redevelopment Group V, LLC and Dawn Staley's cross-motion to amend its Answer and Third-party Complaint; (3) Third-party defendant Flynn Appraisal Associates Inc.'s motion to dismiss Defendants' Third-party Complaint; and (4)Third-party defendants Sunset Mortgage Company, L.P. and Sunset Commercial Group, LLC's motion to dismiss Defendants' Third-party Complaint. The Court has considered, in their entirety, the voluminous written submissions of all parties and heard oral argument on the four motions on February 15, 2006.

The simpler of the four motions are Plaintiff's motion for leave to amend and Defendants' cross-motion to amend which, because Plaintiff and Defendants have the right to amend their pleadings once as a matter of course under Fed.R.Civ.P. 15(a), will be granted and Plaintiff will be permitted to file its proposed first amended complaint (the "FAC") and Defendants will be permitted to file its proposed first amended answer, cross-claims and counterclaims (the "FAA"). The granting of Plaintiff's motion and Defendants' crossmotion, however, does not moot either third-party defendants Flynn Appraisal Associates Inc.'s or Sunset Mortgage Company LP/Sunset Commercial Group, LLC's respective motions to dismiss. Because the Court finds unpersuasive the arguments made by third-party defendants in their respective motions to dismiss— namely that Defendants have failed to properly plead their fraud and negligencerelated claims and that, even if properly pled, these claims do not state a cause of action upon which relief can be granted— the Court will deny both third-party defendants' motions to dismiss. The Court will explain these findings herein.

I. BACKGROUND¹

This case centers on an athletic facility known as "The Coliseum" in Voorhees, New Jersey (the "Coliseum"). The property is a 22-acre commercial sports facility, containing an ice rink, gym, indoor and outdoor swimming pool, fitness center, banquet facility and office space. (FAC ¶ 7.)

A. Origins of the Alleged Scheme to Defraud Defendants

According to Defendants,² an individual named Jay Phillips ("Phillips"), who at one time owned the Coliseum but lost it in a foreclosure action, devised a scheme to recover the property. (FAA ¶ 25-26.) In furtherance of his scheme, Phillips approached Dawn Staley³ ("Staley") and requested that she help him re-acquire the Coliseum by providing $200,000 for a down payment. (Id. ¶ 27.) According to Defendants, Phillips represented that he would obtain a mortgage from Sunset Commercial Group, LLC ("Sunset Commercial") and/or Sunset Mortgage Company, LP ("Sunset Mortgage")⁴ for the remainder of the purchase price. (Id. ¶ 27, 29.) It was agreed that the parties would form Redevelopment Group V, LLC, a Pennsylvania limited liability company—with Staley as the sole member—to serve as the legal entity by which the parties would acquire the Coliseum. (Id. 32.) Phillips allegedly told Staley that, because the Coliseum would be owned by Redevelopment Group V, LLC ("Redevelopment") and operated by Phillips through his limited liability company (Redevelopment Group V Property Management, LLC), Staley would not have any personal or financial responsibility for the project. (Id. ¶ 30.) Staley eventually contributed $130,000 to the down payment. (Id. ¶ 31.) Phillips told Staley that he would pay the $70,000 difference. (Id.)

According to Defendants, Phillips worked in concert with Steven Forman ("Forman") and Andrew Benish (an employee of Greentree Mortgage Company) to consummate the deal in which Redevelopment would purchase the Coliseum. (Id. ¶ 27 and 33.) As the closing approached, Defendants allege that Phillips and Forman induced Staley to sign a personal guaranty for what Phillips and Forman called a short-term "bridge mortgage." (Id. ¶ 67.) Specifically, Phillip and Forman told Staley that, under the bridge mortgage, she would sign a personal guaranty but the guaranty would only cover the 90-day bridge loan. (Id. ¶ 35.) Staley need only personally guaranty the shortterm bridge loan, according to Phillip and Forman, because the two had arranged long-term financing from Greentree Mortgage Company that would replace (or "take out") the bridge loan she guaranteed. (Id. ¶ 35-37.)

B. Representations Regarding the Status of the Coliseum

In addition to alleged misrepresentations Phillips and Forman made to Staley regarding the financing aspect of the transaction, Phillips and Forman allegedly told Staley that the Coliseum was worth at least $9,000,000. (Id. ¶ 57.) Phillips and Forman allegedly told Staley that she was financially protected in the transaction because (1) she would be taking out a $4,700,000 mortgage on a property that was actually worth'$9,000,000, and (2) the monthly income stream from the property's current lessees was greater than the monthly mortgage payments. (Id.) In order to justify the Coliseum's value and representations made to Staley regarding the rental income stream, Defendants allege that Phillips, Forman, and Benish created a number of fake leases. (Id. ¶ 38, 42-45.) One such "lease" involved the Philadelphia Phillies ("Phillies"). (Id. ¶ 38-39.) Defendants allege that Phillies' employee, Rob Holiday ("Holiday") was brought into the scheme in order to (i) create bogus letters (on Phillies' letterhead) stating that the Phillies had committed to lease space at the Coliseum and (ii) personally represent the same fo Staley. (Id. ¶ 38-41.)

Next, Phillips, Forman, and Benish allegedly prepared a fake loan application to Plaintiff that was in Staley's name (although Staley insists that she never saw the application and the contact information on the application listed Benish's email address rather than any of Staley's contact information.) (Id. ¶ 48-49.) Incorporated into...