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United Bank & Trust v. PNC Financial Services Group

October 21, 2009

UNITED BANK & TRUST, PLAINTIFF
v.
THE PNC FINANCIAL SERVICES GROUP, INC., ET AL. DEFENDANTS



The opinion of the court was delivered by: Chief Judge Kane

MEMORANDUM

Before the Court are three separate motions to dismiss filed by Defendants Sterling Financial Corporation ("Sterling")(Doc. No. 17), The PNC Financial Services Group, Inc. ("PNC") (Doc. No. 18), and Equipment Finance, LLC ("EFI") (Doc. No. 19). The motions are fully briefed and are ripe for disposition. For the reasons that follow, the motions will be granted in part and denied in part.

I. BACKGROUND

A. Factual Background

On March 14, 2007, Plaintiff First United Bank & Trust ("First United"), entered into a Master Loan Assignment Agreement ("Master Agreement") with Defendant EFI for the purchase of logging equipment loans in EFI's portfolio. (Doc. No. 1 ¶ 18.) EFI is a Pennsylvania limited liability company that provides financing for forestry and land-clearing operations in the softwood chip business. (Id. ¶ 4.) It is alleged that EFI acted as the alter ego, instrumentality, and agent of Sterling in all the dealings between First United and EFI. (Id. ¶¶ 13, 16.) Sterling owned 100% of EFI's stock, controlled EFI's management employees, and had access to EFI's business records. (Id. ¶ 14.) Sterling, and EFI as its wholly owned subsidiary, merged with Defendant PNC on or about April 4, 2008. (Id. ¶ 6.)

In early 2007, Sterling and EFI contacted First United to offer part of EFI's equipment loan portfolio for sale. (Id. ¶ 8.) Representatives from the companies met to discuss the sale, and, in negotiations leading up to the master agreement, it is alleged that EFI and Sterling held themselves out as experts in making these equipment loans to the logging industry. (Id. ¶ 9.) They represented to First United, inter alia, that the loans had extremely low delinquency rates, had suffered no losses during recent years, and were secured by equipment collateral that was in good condition. (Id. ¶ 9.) They also represented that the loans had passed two separate reviews by the United States Office of the Comptroller of the Currency. (Id. ¶ 12.) These representations "gave false assurances" and further "lulled and deceived" First United about the true nature and quality of the equipment loans. (Id.) First United alleges that these representations were part of a fraudulent scheme perpetrated by EFI and Sterling and calculated to entice First United and other financial institutions to purchase equipment loans from EFI. (Id.) This scheme included: "subverting the putative internal controls of EFI; concealing credit delinquencies; falsely claiming no losses on the Loan Portfolio; falsifying financial contracts and related documents; and related actions and inactions in connection with EFI's equipment loan business . . . ." (Id.)

First United alleges that, as a result of EFI and Sterling's intentional and negligent misrepresentations about the loans, it was induced to enter into the Master Agreement and purchased ten equipment loans for $1,544,712.40. (Id. ¶¶ 17, 19-20.) Under the Master Agreement, EFI was to administer the loans and collect the proceeds for First United. (Id. ¶ 19.)

First United noted that the loans were not performing up to expectations shortly after they were purchased. (Id. ¶ 21.) On or about April 20, 2007, First United received news from King T. Knox ("Knox"), President of Sterling Financial Corporation's Correspondent Services Group, that Sterling would be amending its financial statements from 2004, 2005, and 2006 due to irregularities in EFI's equipment financing contracts. (Id. ¶ 22.) Neither EFI nor Sterling had previously notified First United about any irregularities with EFI's loan portfolio, and despite the irregularities, Knox continued to represent that problems related to the irregularities did not affect the loans First United had purchased. (Id.) Subsequently, on May 24, 2007, Sterling released a press release announcing the existence of a fraudulent scheme orchestrated by high ranking EFI officers and employees resulting in the termination of five employees, including EFI's Chief Operating Officer and Executive Vice President. (Id. ¶ 23.) It is also alleged that EFI and Sterling improperly made payments on behalf of, or otherwise propped up the First United loans to conceal their substandard performance and the fraud. (Id. ¶ 24.) First United eventually learned that EFI had breached terms of the master agreement by withholding accurate information about administration of the equipment loans and the status of the collateral. (Id. ¶¶ 26-27.) Specifically, certain EFI equipment loans are alleged to be under-collateralized or not adequately supported by collateral, contrary to initial representations by EFI and Sterling. (Id. ¶ 29.)

As of the filing of the complaint in this action, two of the ten loans had been resolved, leaving eight loans outstanding that were purchased for $1,238,111,10. (Id. ¶ 20.)

B. Procedural Background

First United filed the complaint in this action on March 6, 2009, alleging seven causes of action: Breach of Contract (Count I), Negligent Misrepresentation/Non-Disclosure (Count II), Intentional Misrepresentation/Non-Disclosure (Count III), Breach of Fiduciary Duty (Count IV), Conversion (Count V), Aiding and Abetting Breach of Fiduciary Duty (Count VI), and Concerted Tortious Conduct (Count VII). On each count, First United seeks damages in the amount of the purchase price of the eight remaining loans, $1,238,111.10, less principal payments received, plus accrued interested, late charges, and attorneys' fees. First United also seeks $10,000,000.00 in punitive damages on Counts III, IV, V, VI, and VII

C. Standard of Review

In analyzing a complaint under Rule 12(b)(6), "courts accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (quoting Pinker v. Roche Holdings Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)). The plaintiff still must provide more than a formulaic recitation of a claim's elements that amounts to mere labels and conclusions. Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007). Additionally, the complaint's "factual allegations must be enough to raise a right to relief above the speculative level." Id. This does not impose a probability requirement at the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element." Phillips, 515, F.3d at 234 (internal quotations and citations omitted).

II. DISCUSSION

The Defendants have all separately moved to dismiss parts of the complaint. The Court will consider each motion as argued by the parties.

A. EFI

In its motion, Defendant EFI asserts that breach of contract is the only viable cause of action in the complaint and seeks dismissal of the remaining counts. It advances several arguments in support of dismissal of the various counts, which will be considered in turn.

1. Gist of the Action Doctrine

EFI argues that First United's claims for negligent misrepresentation, intentional misrepresentation, and breach of fiduciary duty must be dismissed because they violate Pennsylvania's "gist of the action" doctrine.*fn1

Pennsylvania law precludes a plaintiff from bringing tort claims where the complained-of injury arises out of defendant's failure to fulfill its contractual obligations unless "the [tort] wrong ascribed to the defendant [is] the gist of the action with the contract being collateral." Phico Ins. Co. v. Presbyterian Med. Servs. Corp., 663 A.2d 753, 757 (Pa. Super. 1995); see also Pittsburgh Constr. Co. v. Griffith, 834 A.2d 572, 581 (Pa. Super. 2003) ("a claim should be limited to a contract claim when the parties' obligations are defined by the terms of the contracts, and not by the larger social policies embodied by the law of torts."); Etoll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10, 14 (Pa. Super. 2002) ("the [gist of the action] doctrine is designed to maintain the conceptual distinction between breach of contract claims and tort claims[]" and "[a]s a practical matter, the doctrine precludes plaintiffs from re-casting ordinary breach of contract claims into tort claims."). The Pennsylvania Superior Court has explained that the gist of the action doctrine bars tort claims: (1) arising solely from a contract between the parties; (2) where the duties allegedly breached were created and grounded in the contract itself; (3) where the liability stems from a contract; or (4) where the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of a contract. Hart v. Arnold, 884 A.2d 316, 340 (Pa. Super. Ct. 2005) (citations omitted).

The negligent misrepresentation, intentional misrepresentation, and breach of fiduciary duty claims are based on alleged misrepresentations made before and after the Master Agreement was executed. Given the nature of the gist of the action doctrine and the manner in which the parties have presented this issue in their briefs, the Court will evaluate these alleged misrepresentations separately.

a. Pre-Agreement Misrepresentations

First United asserts that the gist of the action doctrine does not operate to bar their claims based on misrepresentations made before the Master Agreement was entered into by the parties. (Doc. No. 26 at 7.) In support of this contention, First United points out that these misrepresentations are in the nature of "fraudulent inducement," involving facts material to its decision to enter into the Master Agreement, and clearly invoke the social obligations against fraud rather than the obligations created under the contract. (Id.) EFI contends that these fraudulent inducement allegations are still barred because the Master Agreement explicitly includes the representations and covenants each party was entitled to rely upon and provides the terms of recovery to seek relief for breach. (Doc. No. 22 at 13-14.) EFI also argues that these three claims essentially duplicate the breach of contract claim in Count I. (Id.)

Courts have recognized that "fraud in the inducement of a contract would not necessarily be covered by the gist of the action doctrine because fraud to induce a person to enter into a contract is generally collateral to (i.e., not 'interwoven' with) the terms of the contract itself." Air Products and Chemicals, Inc. v. Eaton Metal Products Co., 256 F. Supp. 2d 329, 341 (E.D. Pa. 2003) (quoting Etoll, 811 A.2d at 17). Fraud in the inducement claims are therefore "much more likely to present cases in which a social policy against the fraud, external to the contractual obligations of the parties, exists." Id. There is not an absolute exception for all fraudulent inducement claims, however. For example, several district courts evaluating the gist of the action doctrine have held that fraudulent inducement claims are still barred when the fraudulent statement made during negotiations becomes the basis for a subsequently executed contractual duty. Bryan's Quality Plus, LLC v. Shaffer Builders, Inc., No. 07-CV-2311, 2008 WL 3523935, *4 (E.D. Pa. 2008); see also Williams v. Holton Group PLC, 93 Fed. App'x 384, 386 (3d Cir. 2004). Considering the gist of the action doctrine as outlined above, the Court finds the approach adopted by these courts persuasive and will apply it to the present action.

After reviewing the Master Agreement and Plaintiff's complaint, the Court finds that the allegations of fraudulent inducement are barred by the gist of the action doctrine. The Master Agreement explicitly set outs the "warranties, representations, and covenants" made by each party in sections 2 and 3. In pertinent part, EFI represented that:

(f) [EFI] shall have no actual knowledge . . . of any facts impairing the validity of the Transaction Documents subject of any Specifications executed in connection herewith, or of any rights created thereby, the Equipment or Collateral described in such Transaction Documents or this Agreement; and

(g) The payments due under the Transaction Documents subject of any Specifications executed in connection herewith shall be current in all respects, except as is disclosed to [First United] in writing under such Specification; and

(h) [EFI] has no actual knowledge . . . regarding any material adverse credit information regarding the Obligor subject of any Specifications executed in connection herewith, except as shall be disclosed to [First United] in writing at the time of the execution of the applicable Specification. (Doc. No. 22-2 § 2(f)-(h) (hereinafter "Master Agreement").)*fn2 The Master Agreement also sets out EFI's loan administration duties in significant detail. (See Master Agreement ยง 7(a)-(h).) It is clear that these representations and duties detailed in the Master ...


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