Opinion
CIVIL ACTION NO. 05-12338-GAO.
July 31, 2007
ORDER
In December 1999, the plaintiffs Neuro-Rehab Associates, Inc. and Neuro-Rehab Associates (collectively "Neuro-Rehab") obtained a $20 million loan from Amresco Commercial Finance, LLC ("AMRESCO"). The plaintiffs' loan was pooled with other borrowers' loans in the 1999-2 SBL Loan Pool ("1999-2 Pool"). A key provision of the loan was its "Credit Enhancement" feature, a mechanism through which borrowers in the pool effectively covered their pro rata share of delinquencies by the other borrowers in the pool. Consequently, to some degree each borrower's obligations were connected with, and affected by, the performance by other borrowers in the loan pool. The plaintiffs allege that the defendants made material misrepresentations regarding the pool, other borrowers, and the Credit Enhancement feature that led the plaintiffs to enter into the loan agreement.
Neuro-Rehab's amended complaint presented five claims: (1) rescission, (2) intentional misrepresentation, (3) breach of contract and covenant of good faith and fair dealing, (4) unfair and deceptive practices in violation of Massachusetts Gen. Laws ch. 93A, and (5) tortious interference. In a previous order, I dismissed the Chapter 93A claim for the reason that, by the parties' choice of law, Idaho law applies to their controversy.See Neuro-Rehab v. AMRESCO, No. 05-12238 (D. Mass. June 19, 2006) (memorandum and order) (dkt. no. 51). The defendants now move for partial summary judgment on the remaining counts of the first amended complaint.
The defendants do not move on so much of Count III as alleges that the defendants attempted to improperly accelerate the plaintiffs' loan notwithstanding the plaintiffs' compliance with the loan documents, thereby constituting a breach of contract and the covenant of good faith and fair dealing.
Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); Int'l Strategies Group, Ltd. v. Greenberg Traurig, LLP, 482 F.3d 1, 6 (1st Cir. 2007). In determining whether any genuine issue of material fact remains, the record is viewed in the light most favorable to the non-moving party with all reasonable inferences drawn in their favor. Iverson v. City of Boston, 452 F.3d 94, 98 (1st Cir. 2006).
I. Counts I and II (Rescission and Intentional Misrepresentation)
The defendants argue that the claims in Count I and II are time-barred under the relevant statute of limitations. According to the defendants, Neuro-Rehab's claims of fraudulent inducement and intentional misrepresentation accrued as of October 16, 2000 when Neuro-Rehab was first required to pay the maximum, unrebated Credit Enhancement. As of that time, the defendants argue, the plaintiffs were on notice that they were being called on to make payments on account of other borrowers' defaults despite the defendants' representations, among other things, that such payments would be highly unlikely. At the least, say the defendants, Neuro-Rehab was on inquiry notice of the possibility of a claim, sufficient to start the limitations period running. To the extent Neuro-Rehab did not have enough information to assert claims, the defendants urge, their own lack of diligence, and not any obstruction by the defendants, was to blame.
The plaintiffs counter that they first learned of the defendants' fraud in June 2005. Prior to that time, they say, they did not know, and had no reason to know, facts necessary to formulating and presenting actionable claims of fraud or misrepresentation. Moreover, between October 2000 and June 2005, Neuro-Rehab asserts that repeated inquiries directed to AMRESCO regarding loan payments were met by AMRESCO's assurances that kept the fraud and misrepresentations concealed from Neuro-Rehab. The plaintiffs contend that it was only in June 2005, when Neuro-Rehab learned for the first time that they would have to pay the maximum Credit Enhancement until the end of the loan term, that they realized that they had been deceived. (See Pls.' Concise Statement of Material Facts of Record as to Which There Exists a Genuine Issue to be Tried, Exh. D ¶ 10.)
The parties agree that the applicable limitations period is three years from the accrual of the cause of action. Typically, a federal court sitting in diversity would apply the statute of limitations of the forum state, in this case Massachusetts. Rodi v. S. New England Sch. of Law, 389 F.3d 5, 13 (1st Cir. 2004). As noted above, in a previous ruling, however, I ruled that Idaho law had effectively been chosen by the parties to apply to their transaction. Whether that choice of law by the parties extends to the statute of limitations is an interesting question that does not need to be answered at this point because both Massachusetts and Idaho provide a three-year statute of limitations applicable to the claims set forth in Counts I and II. Idaho Code Ann. § 5-218(4); Mass. Gen. Laws ch. 260, § 2A; see also Millipore Corp. v. Travelers Indem. Co., 115 F.3d 21, 29 (1st Cir. 1997). Under Idaho law, a cause of action will accrue only when the plaintiffs knew, or should have reasonably known, of facts tending to suggest that the plaintiffs had been injured by the defendants' wrong. Idaho Code § 5-218(4) (providing that in an action for relief on the ground of fraud, the cause of action is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud). In Massachusetts, "the statute of limitations for a particular cause of action does not begin to run until the plaintiff knows, or should have known, that she has been harmed by the defendant's conduct." Silvestris v. Tantasqua Reg'l Sch. Dist., 847 N.E.2d 328, 336 (Mass. 2006). "The question when a plaintiff knew or should have known of his cause of action is one of fact which in most instances will be decided by the trier of fact." Riley v. Presnell, 409 Mass. 239, 240 (Mass. 1991); see also Nerco Minerals Co. v. Morrison Knudsen Corp., 90 P.3d 894, 900 (Idaho 2004) ("Where discovery of a cause of action for fraud commences the statute of limitations, the date of discovery is a fact question for the jury unless there is no evidence creating a question of fact.").
Thus, for purposes of the statute of limitations defense, the first task is to determine when Neuro-Rehab had reason to know of the facts constituting the alleged fraud (as required by Idaho law) or when Neuro-Rehab had reason to know it had been harmed by the defendants (as required by Massachusetts law). As to that task, under either Idaho's or Massachusetts's formulation, the record presented with respect to the present motion discloses a genuine factual dispute that cannot be resolved by summary judgment. Accordingly, as to Counts I and II, the defendants' motion must be denied.
II. Count III (Breach of Contract and Covenant of Implied Fair Dealing)
With respect to Count III, the plaintiffs argue that the covenant implied by law "requires that the parties perform, in good faith, the obligations imposed by their agreement,"Lettunich v. Key Bank Nat'l Ass'n, 109 P.3d 1104, 1110 (Idaho 2005), and that the defendants have breached the covenant by failing to exercise their discretion in good faith to recover on defaulted loans in the 1999-2 Pool. The defendants counter that the loan documents "do not impose any duties, obligations, or requirements on AMRESCO vis-à-vis its efforts to seek recoveries from the borrowers in Neuro-Rehab's Loan Pool who default on their loan obligations." (Defs.' Mem. of Law in Supp. of Their Mot. for Partial Summ. J. 32.) Moreover, the defendants point to § 7(c) of the promissory note in which Neuro-Rehab consented to AMRESCO being the sole authority with discretion to pursue and resolve defaults by other borrowers. The defendants point out under Idaho law, any implied covenant cannot be "contrary to the terms of the contract negotiated and executed by the parties."Idaho Power Co. v. Cogeneration, Inc., 9 P.3d 1204, 1216 (Idaho 2000). Therefore, they argue, this claim fails because the plaintiffs' theory would have the implied covenant add a term that is not only absent from the parties' contracts, but varies the substance of the terms explicitly in the parties' contracts.
The "loan documents" refers to the promissory note, security agreement, and mortgage.
In Idaho, the covenant of good faith and fair dealing is violated when "action by either party . . . violates, nullifies or significantly impairs any benefit of the . . . contract. . . ." Metcalf v. Intermountain Gas Co., 778 P.2d 744, 749 (Idaho 1989), modified by Sorensen v. Comm Tek, Inc., 799 P.2d 70 (Idaho, 1990). The covenant requires "that the parties perform in good faith the obligations imposed by their agreement." Idaho First Nat'l Bank v. Bliss Valley Foods, Inc., 824 P.2d 841, 863 (Idaho 1991) (quoting Badgett v. Sec. State Bank, 807 P.2d 356, 356 (Wash. 1991)); see also Sorensen v. Comm Tek, Inc., 799 P.2d 70, 75 (Idaho 1990). An objective standard of reasonableness is to be applied in judging whether a party's actions were in breach of the implied covenant of good faith. Jenkins v. Boise Cascade Corp., 108 P.3d 380, 390 (Idaho 2005) ("[T]he covenant is an objective determination of whether the parties have acted in good faith in terms of enforcing the contractual provisions.").
The loan documents provide that "the Lender may, at any time and from time to time, without notice or demand, and without affecting the enforceability or continuing effectiveness hereof . . . enforce any security or guarantees, and apply any security and direct the order or manner of sale thereof as the Lender in its sole and absolute discretion." Promissory Note § 7(c) "Consents and Waiver" (emphasis added); see also id. § 10. Furthermore, there is no express provision in any of the loan documents imposing on AMRESCO a duty to recover on defaulted loans. The plaintiffs' contention in Count III essentially is that, notwithstanding (I) the absence of any affirmative obligation on AMRESCO's part to take any particular steps to recover on defaulted loans and (ii) the express agreement by the parties that AMRESCO would have "sole and absolute discretion" as to such matters, the implied covenant nonetheless imposed obligations to minimize losses within the Pool that AMRESCO failed to fulfill. That argument is untenable under Idaho law.See Idaho First Nat'l Bank, 824 P.2d at 863 ("Nor does it 'inject substantive terms into the parties' contract'" (quoting Badgett, 807 P.2d at 360)).
Therefore, the defendants' motion for summary judgment is granted as to this claim.
III. Count V (Tortious Interference)
The defendants argue that the plaintiffs' claim for tortious interference with contractual relations must fail because there is no evidence that AMRESCO's acceleration of Neuro-Rehab's loan payments interfered with an existing contract between Neuro-Rehab and any third-party. The plaintiffs offer a half-hearted opposition, contained within a footnote, simply stating, "Clearly, AMRESCO's improper acceleration was designed to and would have interfered with Neuro-Rehab's relationships with its clients and physicians. . . . It is premature to determine whether AMRESCO's bad faith conduct also caused damage to its relationships with clients, physicians, etc." (Pls.' Mem. in Opp'n to Def.'s Mot. for Partial Summ. J. 35 n. 18.)
Under Idaho state law, a "prima facie case of tortious interference with a contract exists where a plaintiff establishes: (a) the existence of a contract, (b) knowledge of the contract on part of the defendant, (c) intentional interference causing breach of the contract and (d) injury to the plaintiff resulting from the breach." Thirsty's L.L.C. v. Tolerico, 137 P.3d 435, 437 (Idaho 2006) (citing Barlow v. Int'l Harvester Co., 522 P.2d 1102, 1114 (1974)). A party cannot tortiously interfere with his own contract. See Ostrander v. Farm Bureau Mut. Ins. Co. of Idaho, Inc., 851 P.2d 946, 950 (Idaho 1993).
A separate cause of action, for wrongful interference with economic relationships, may be established if the plaintiffs, can show that "any claimed intentional interference with a prospective economic advantage resulting in injury to the plaintiff 'is wrongful by some measure beyond the fact of the interference itself.' The plaintiff must establish that the intentional interference resulting in injury was wrongful, which may be shown by proof that either: (1) the defendant had an improper objective or purpose to harm the plaintiff; or (2) the defendant used a wrongful means to cause injury to the prospective business relationship." Idaho First Nat'l Bank, 824 P.2d at 861 (citations omitted); see also Highland Enters., Inc. v. Barker, 986 P.2d 996, 1004 (Idaho 1999).
The plaintiffs' claim for tortious interference with a contract is woefully insufficient. The plaintiffs have not identified any specific contracts the defendants are alleged to have interfered with, let alone shown how the defendants' acceleration of the 1999-2 SBL loan interfered with such contracts. Without any evidence as to such matters, the plaintiffs have not met their burden, as a matter of law, on this claim. Nw. Bec-Corp v. Home Living Serv., 41 P.3d 263, 269 (Idaho 2002) (affirming the grant of summary judgment on tortious interference claim for the plaintiffs' failure to meet their burden because they did not establish the existence of their customer contracts). Vague and conclusory statements such as its "relationships with clients and physicians" were harmed do not suffice to create a material issue of fact.
Any possible claim of wrongful interference with economic relationships fares no better. Once again, the plaintiffs fail to point out particular economic relationships that were interfered with by the defendants. The best that appears in the plaintiffs' favor is that the defendants' acceleration of the loan had collateral effects for the plaintiffs, including perhaps effects felt in the plaintiffs' relationships with others, such as clients and physicians. Such collateral effects might qualify as elements of damages for wrongful acceleration of the loan, but they do not form a foundation for a tortious interference claim.
Summary judgment should be granted to the defendants as to this claim.
IV. Conclusion
In summary, the defendants' motion for partial summary judgment (dkt. no. 74) is GRANTED as to Counts III (breach of contract and covenant of good faith and fair dealing for allegedly failing diligently to pursue recoveries from defaulting borrowers) and Count V (tortious interference). The motion is DENIED as to Count I (rescission) and II (intentional misrepresentation), both of which counts will stand for trial.
It is SO ORDERED.