Summary
explaining that "[d]ates are important to inform the defendant of such things as whether a statute of limitations defense is available against a particular claim"
Summary of this case from Tyler v. BergerOpinion
Civil Action No. 3:99CV000103
October 20, 2000
James Benjamin Dick, LAW OFFICES OF J. BENJAMIN DICK, CHARLOTTESVILLE, VA, for plaintiff.
Michael Eugene Derdeyn, McGUIRE, WOODS, BATTLE BOOTHE, CHARLOTTESVILLE, VA, for defendant.
MEMORANDUM OPINION
This case comes before the court on the plaintiff's objections to the April 26, 2000 Report and Recommendation of the presiding United States Magistrate Judge. The Magistrate Judge recommended that the court grant the defendant's motion to dismiss all of the plaintiff's causes of action pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, the plaintiff's objections shall be overruled, the Magistrate Judge's findings and recommendations shall be accepted in part and rejected in part, and the defendant's motion to dismiss shall be granted.
I.
In deciding a motion to dismiss under Rule 12(b)(6), the court must determine "whether the complaint, under the facts alleged and under any facts that could be proved in support of the complaint, is legally sufficient." Eastern Shore Markets, Inc. v. J.D. Assocs. Ltd. Partnership, 213 F.3d 175, 180 (4th Cir. 2000). The court must "assume the truth of all facts alleged in the complaint and the existence of any fact that can be proved, consistent with the complaint's allegations . . . [but] need not accept the legal conclusions drawn from the facts. . . . [or] accept as true unwarranted inferences, unreasonable conclusions, or arguments." Id. (citations omitted). The following relatively simple facts are taken from the plaintiff's Motion for Judgment (hereinafter, "complaint"), and are assumed to be true.
The plaintiff is a Virginia corporation and the defendant is an officer of a Texas corporation ("TMD"). The plaintiff entered into certain contracts with TMD, pursuant to which the plaintiff agreed to produce and sell TMD computer software and various other goods. The goods were designed specifically for TMD's business, to achieve a particular purpose. Prior to entering the contracts, the defendant assured the plaintiff that TMD was financially sound and that the plaintiff would receive payment once the goods were received. The plaintiff at some point received a bankruptcy notice relating to TMD. TMD currently is in bankruptcy. The defendant told the plaintiff to disregard the notice, because TMD was coming out of bankruptcy, and that, in any event, the defendant personally would guarantee payment in full for the goods if the plaintiff shipped them. The defendant knew at the time that he would not pay, and that the plaintiff would be damaged as a result. Relying on the defendant's representation, the plaintiff produced and shipped the goods. The defendant assured the plaintiff that payment on the first order was forthcoming, and ordered additional goods, which the plaintiff shipped. The total value of the shipped goods was $30,000. Despite the defendant's personal assurances, the plaintiff never received payment.
In September 1999, the plaintiff sued the defendant in the Circuit Court of Albemarle County, alleging that the defendant intentionally and maliciously made false representations to the plaintiff to induce the plaintiff to enter the contracts. The complaint contains two counts: (1) Fraud, and (2) Breach of Contract. The case was removed to this court on November 12, 1999, and the defendant filed a motion to dismiss on the same day.
II.
The matter was referred to the Magistrate Judge to set forth findings, conclusions, and recommendations for its disposition. See 28 U.S.C.A. § 636(b)(1)(B) (West 1993 Supp. 2000). On April 26, 2000, the Magistrate Judge issued his Report and Recommendation. The Magistrate Judge found the fraud claim insufficient because it is not pleaded with particularity, and because the alleged misrepresentations were simply promises to act in the future, and thus, not actionable as fraud. The Magistrate Judge also found that the plaintiff's breach of contract claim is barred by the Statute of Frauds, and fails to allege consideration. The plaintiff filed objections to the Report and Recommendation on May 8, 2000. The court subjects the proposed findings and recommendations of the Magistrate Judge to de novo review. See 28 U.S.C.A. § 636(b)(1) (West 1993); Fed.R.Civ.P. 72(b).
A.
The plaintiff first objects to the recommended dismissal of its fraud claim. Citing Sit-Set, A.G. v. Universal Jet Exchange, Inc., 747 F.2d 921 (4th Cir. 1984), the plaintiff states that it "is entitled to prove the fraud of this corporate officer." Sit-Set is entirely inapposite to the case at bar, as it simply recites the unremarkable proposition that "[c]orporate officers may of course be liable jointly and severally with their corporation for obligations arising out of tortious conduct of the officers that subject the corporation to liability." Id. at 929. The Magistrate Judge did not find that the defendant could not be held jointly and severally liable with his corporation. On an entirely different note, the Magistrate Judge found that the plaintiff failed to plead fraud with particularity, and that the alleged misrepresentations were insufficient to support a claim of fraud because they only constituted promises to act in the future. With the first proposition, the court agrees.
Under Federal Rule of Civil Procedure 9(b), "the circumstances constituting fraud . . . shall be pled with particularity." "[T]he `circumstances' required to be pled with particularity under Rule 9(b) are `the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.'" Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999) (quoting 5 Charles Alan Wright Arthur R. Miller, Federal Practice and Procedure: Civil § 1297, at 590 (2d ed. 1990)).
In this case, the plaintiff utterly failed to plead the time and place of the false representations. Although the complaint clearly indicates that the misrepresentations induced the plaintiff to enter the contracts, the complaint contains no dates whatsoever. Therefore, it is impossible to determine when the alleged contracts were entered, and hence, when the alleged misrepresentations were made.
See Compl. at 1 ¶ 2 (stating that the contracts " were obtained on false representations of material facts" (emphasis added)); Compl. at 1 ¶ 4 (indicating that the defendant falsely represented that TMD was coming out of bankruptcy and that he personally would guarantee payment, " provided [the plaintiff] shipped the goods to him and his company," implying that the representations were made before the plaintiff agreed to ship the goods (emphasis added)); Compl. at 3 ¶ 8 ("The defendant had a duty . . . to honor his representation that . . . he would personally make certain that the money was coming to the plaintiff if [the plaintiff] shipped the goods." (emphasis added)); Compl. at 3 ¶ 2 (" Upon this representation which was false, the plaintiff produced, manufactured, and delivered the goods requested by the defendant and his [T]exas company." (emphasis added)).
The Magistrate Judge and both parties refer to a certain purchase order purportedly attached to the complaint. ( See Compl. at 2 ¶ 7 (referencing the "attached" purchase order).) However, the original complaint (which the court received from the Clerk of the Circuit Court of Albemarle County) does not contain any attachments. The only purchase order in the record is one attached to the defendant's reply memorandum. The plaintiff attached the same purchase order, and several billing statements, to its "Motion to Remand and Memorandum of Law," filed December 1, 1999.
Although the court might be able to consider all of these additional materials to piece together some sort of time frame for the contracts and alleged misrepresentations, this would require the court to convert the motion to dismiss into a motion for summary judgment under Rule 56. See Fed.R.Civ.P. 12(b) ("If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment. . . ."). The court has complete discretion to decide whether to consider the additional materials, or to refuse to consider them and determine the motion under normal 12(b)(6) standards. See Finley Lines Joint Protective Bd. Unit 200, Broth. Ry. Carmen v. Norfolk Southern Corp., 109 F.3d 993, 996 (4th Cir. 1997). The court refuses to consider the additional materials in this case — and thus excludes the matters outside the pleadings for the purpose of this motion — because considering the extraneous materials would entail further delay of the disposition of this motion. See Fed.R.Civ.P. 12(b)(6) (upon conversion, the parties "shall be given a reasonable opportunity to present all material made pertinent to such a motion by Rule 56."). Because the complaint contains no attachments as filed, the court only shall consider its allegations in ruling upon the defendant's motion. The complaint having alleged no dates whatsoever, and it also having failed to indicate where the misrepresentations were made, the plaintiff failed to plead fraud with particularity.
Dates are important to inform the defendant of such things as whether a statute of limitations defense is available against a particular claim. Even if the plaintiff had attached to its complaint the single purchase order which it claimed to have attached, the complaint still would fail to plead fraud with particularity, because the question of when the alleged misrepresentations took place still would be left open.
The Magistrate Judge alternatively found that the alleged misrepresentations only were promises to act in the future, and as such, are insufficient to sustain a claim for fraud. The court disagrees with this finding. Even though it is well-established that "fraud must relate to a present or pre-existing fact, and cannot ordinarily be predicated on unfulfilled promises or statements as to future events," ITT Hartford Group, Inc. v. Virginia Fin. Assocs., Inc., 520 S.E.2d 355, 361 (Va. 1999) (internal quotation marks and citations omitted), the complaint alleges that "[t]he defendant personally assured the Plaintiff that his company was financially sound," (Compl. at 1 ¶ 3), presumably prior to the formation of the contract, and while the company actually was in bankruptcy. ( See Compl. at 2 ¶ 6.) As such, this misrepresentation would have related to a present or pre-existing fact — the soundness of the company's then-existing financial state — and it would have been knowingly false when made.
Moreover, the Supreme Court of Virginia recognizes an exception to the "future events" rule, when the fraud is "predicated . . . on promises made with a present intention not to perform them." Elliott v. Shore Stop, Inc., 384 S.E.2d 752, 756 (Va. 1989). In such cases, "the gist of the fraud . . . is the fraudulent intent," id., which is a matter of present fact. The complaint clearly alleges that the various misrepresentations were made prior to the formation of the contract, to induce formation, see note 1 supra, and that, at formation, the defendant knew he would not pay. ( See Compl. at 4 ¶ 10 (alleging — albeit in the breach of contract claim— that "the defendant knew . . . at the time of making the contract that the defendant would breach the contract, [and] not pay.")). Construing the complaint liberally, the fraud is predicated on promises the defendant made, but never intended to perform. Stated differently, the plaintiff's complaint adequately would have pled a claim for fraud in the inducement, were it not for the above-noted deficiencies under Rule 9. See Flip Mortg. Corp. v. McElhone, 841 F.2d 531, 537 (4th Cir. 1988) (noting that in Virginia, "fraud can be found in a breach of contract if the defendant did not intend to perform at the time of contracting" (citing Colonial Ford Truck Sales v. Schneider, 325 S.E.2d 91, 94 (Va. 1985))); Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 346, 348 (Va. 1998) (listing the elements of actual fraud, and discussing fraud in the inducement).
For example, while the complaint makes clear that at least one of the contracts was induced by fraudulent misrepresentation, it is unclear — given the lack of time frame which contracts were induced by which misrepresentation(s), whether all or only some of the contracts were induced by fraud, etc.
The court concludes that the plaintiff failed to plead fraud with particularity, and accepts the Magistrate Judge's recommendation to dismiss the fraud count on that ground. The court rejects the Magistrate Judge's recommendation to dismiss the fraud count on the alternative ground that the misrepresentations only relate to future events. Accordingly, the plaintiff's fraud claim shall be dismissed without prejudice.
B.
The plaintiff next objects to the recommended dismissal of its breach of contract claim. This objection also is without merit. The Magistrate Judge found that the complaint does not allege that the plaintiff contracted with the defendant in his individual capacity, because it does not allege that the defendant received any benefit apart from that which would have inured to him derivatively through the company. Rather, the complaint only seeks to hold the defendant personally liable by virtue of his personal guaranty to satisfy TMD's payment obligations. Because the complaint fails to allege that the personal guaranty was made in writing, the Magistrate Judge concluded that contract claim is barred by the Virginia Statute of Frauds. See Va. Code Ann. § 11-2(4) (Michie 1993) ("Unless a promise, contract, agreement, representation, assurance, or ratification, or some memorandum or note thereof, is in writing and signed by the party to be charged or his agent, no action shall be brought . . . [t]o charge any person upon a promise to answer for the debt, default, or misdoings of another. . . ."). This reasoning was proper.
The court first must determine whether the alleged promises are subject to the Statute of Frauds. The plaintiff appears to concede that they are, and challenges only the finding that the statute was not satisfied in this case. Apparently, the plaintiff agrees that the complaint does not charge the defendant with an original undertaking in his individual capacity, but rather, charges him with breaching a personal guaranty to satisfy the debts of his corporation. ( See Pl.'s Objs. at 2-3 ("Mr. Heath . . . made the personal guarantee as an officer when the orders were shipped and received. . . ."); Pl.'s Ojs. at 2 (stating that the defendant, "as an officer, . . . is presumed to be of full knowledge as to his company's ability to pay." (emphasis added)).) Having reviewed the complaint, the court also agrees that it does not allege that the defendant contracted in his individual capacity; that it alleges only that the defendant received indirect benefits by his promises, ( see Compl. at 2-3 ¶ 6); and that the contract claim is based on the defendant's breach of his personal guaranty to satisfy the debts of his corporation. As such, the personal guaranty is subject to the Statute of Frauds, and the complaint must allege that the personal guaranty was in writing. See Va. Code Ann. § 11-2(4) (Michie 1993); Mid-Atlantic Appliances v. Morgan, 73 S.E.2d 385, 388 (Va. 1952) ("This rule is applied in the case of a promise by an officer or stockholder of a corporation to guarantee payment for services rendered or goods furnished the corporation." (quoting 49 Am. Jur., Statute of Frauds, § 92, at 449)).
As noted above, the plaintiff does not dispute the foregoing. Rather, the plaintiff argues that the Statute of Frauds is satisfied by the defendant's having signed a purchase order for the goods delivered to TMD. The only allegations in the complaint relating to a purchase order are the following: "A purchase order is here attached. The defendant followed up with additional orders per this order and falsely represented to the Plaintiff and its corporate agents and officers that the Plaintiff should not worry, the payment was coming." (Compl. at 2 ¶ 7.) The plaintiff's argument fails for the following reasons. First, the complaint does not allege that the defendant signed any purchase order. Second, even if he had signed a purchase order, the complaint does not allege that the purchase order charged the defendant with contractual obligations. The only reasonable inference to be drawn from the complaint, as pled, is that a purchase order potentially was signed by the defendant as the agent of the entity to be charged, i.e. the defendant's corporation. Third, the only guaranty referenced in connection with the purchase order is that the defendant "falsely represented to the Plaintiff and its corporate agents and officers that the Plaintiff should not worry, the payment was coming." This suggests the guaranty was not part of the written purchase order, but was made orally, after the purchase order was submitted. Fourth, none of the other allegations relating to the defendant's personal guaranty states that the guaranty was made in writing:
The defendant personally assured the Plaintiff that his company was financially sound and that the Plaintiff would receive payment upon receipt of the items. . . . (Compl. at 1 ¶ 3);
In one instance, the defendant falsely represented . . . [that he] would pay for the items regardless and that his company was coming out of bankruptcy and he would personally make certain that the Plaintiff was paid in full provided he shipped the goods to him and his company. (Compl. at 1 ¶ 4);
The defendant had a duty to . . . honor his representation . . . that he would personally make certain that the money was coming to the plaintiff if he shipped the goods. (Compl. at 3 ¶ 8);
The defendant personally assured the plaintiff . . . that the goods contracted were being paid for immediately provided the plaintiff ship the goods. (Compl. at 3 ¶ 1; at 4 ¶ 1.)
In other words, nowhere in the complaint is it alleged that the defendant, in writing, promised to answer for the debt, default, or misdoings of TMD. See Va. Code Ann. § 11-2(4) (Michie 1993). Therefore, the plaintiff's breach of contract claim fails to satisfy the requirements of the Virginia Statute of Frauds.
The plaintiff argues in the alternative that the defendant is estopped from invoking the statute because applying it in this case would "cause a fraud or perpetrate a wrong." (Pl.'s Opp'n at 3.) In support, the plaintiff cites T . . . v. T . . ., 224 S.E.2d 148, 151 (Va. 1976), which stated that "[t]he object of the statute of frauds is to prevent frauds and perjuries, and not to perpetrate them, so that the statute is not enforced when to do so would cause a fraud and a wrong to be perpetrated." T . . . v. T . . . involved a mother's claim that her former husband breached a pre-marital oral contract to treat her illegitimate child as his own. As such, it involved the application of a different subsection of the Statute of Frauds, § 11-2(5), which addresses bilateral agreements "made upon consideration of marriage." The Supreme Court of Virginia later clarified that the estoppel principles expressed in T . . . v. T . . . do not apply to personal guaranty situations arising under § 11-2(4), like those involved in the instant case. See Colonial Ford Truck Sales, Inc. v. Schneider, 325 S.E.2d 91, 93 (Va. 1985) ("[T]o hold that a promisee, upon proof of reliance and detriment, could enforce an oral undertaking by a promisor who derives no direct benefit from the transaction and is only conditionally obligated to perform would effectually repeal Code § 11-2(4)."). Therefore, T . . . v. T . . . is not controlling, and the plaintiff's estoppel argument fails.
The plaintiff may well have a legitimate claim for breach of contract against TMD. However, if it wishes to hold the defendant personally liable for guaranteeing TMD's obligations, that personal guaranty must be in writing. As pled, the complaint does not contain allegations that the defendant, in writing, personally guaranteed the debts of TMD. Therefore, the plaintiff's count for breach of contract shall be dismissed for failure to satisfy the Statute of Frauds.
III.
For the foregoing reasons, the court finds that the plaintiff's fraud count was not pled with adequate particularity, and that the plaintiff's breach of contract count is barred by the Virginia Statute of Frauds. The plaintiff's complaint therefore fails to state a claim for which relief may be granted on any of the counts alleged, and accordingly shall be dismissed without prejudice.
An appropriate Order this day shall issue.
ORDER
This case comes before the court on the plaintiff's objections to the April 26, 2000 Report and Recommendation of the presiding United States Magistrate Judge. The Magistrate Judge recommended that the court grant the defendant's motion to dismiss all of the plaintiff's causes of action. For the reasons set forth in the accompanying Memorandum Opinion, it is accordingly this day
ADJUDGED, ORDERED, AND DECREED as follows:
1. The plaintiff's objections shall be, and they hereby are, OVERRULED;
2. The Magistrate Judge's findings and recommendations shall be, and they hereby are, ACCEPTED IN PART and REJECTED IN PART;
3. The defendant's motion to dismiss shall be, and it hereby is, GRANTED;
4. The plaintiff's complaint shall be, and it hereby is, DISMISSED WITHOUT PREJUDICE;
5. This case shall be, and it hereby is, stricken from the docket of the court.
The Clerk of the Court hereby is directed to send a certified copy of this Order to all counsel of record and to the Magistrate Judge.