Regent Bank v. Birch Rea Partners, Inc.

REGENT BANK, Plaintiff, v. BIRCH REA PARTNERS, INC., Defendant.

CAUSE NO.: 1:16-CV-262-TLS

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF INDIANA

June 14, 2017

OPINION AND ORDER

This matter is before the Court on the Defendant's Motion to Dismiss the Plaintiff's Complaint [ECF No. 14], filed on September 2, 2016. On July 7, 2016, the Plaintiff, Regent Bank, filed a Complaint [ECF No. 1] against the Defendant, Birch REA Partners, Inc. (Birch REA). The Defendant subsequently moved to dismiss the Complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6), asserting that the Complaint fails to state a claim upon which relief may be granted. On September 28, 2016, the Plaintiff filed its Response to the Defendant's Motion to Dismiss [ECF No. 19]. On October 5, 2016, the Defendant filed its Reply in Support of its Motion to Dismiss [ECF No. 20]. With this matter now being fully briefed, the Defendant's Motion to Dismiss is denied for the reasons stated below.

COMPLAINT ALLEGATIONS

The Plaintiff is a Florida bank corporation that is the successor in interest to non-party PNC Bank. (Compl. ¶¶ 1-2, ECF No. 1.) The Defendant is a Massachusetts corporation that served as an appraiser in this case. (Id. ¶¶ 3, 6.) On May 16, 2007, non-party SunTrust Equity Funding, LLC (SunTrust), on behalf of itself and PNC Bank, entered into a contract with the Defendant for the purpose of appraising property to assist PNC Bank in establishing the value for a mortgage of the property. (Id. ¶¶ 6-8.)

On August 17, 2007, the Defendant provided SunTrust and PNC Bank with the Appraisal [ECF No. 1-1] that indicated the property's market value. (Id. ¶ 6.) The cover of the Appraisal states that it was "Prepared for: SunTrust & PNC" (Appraisal 3, ECF No. 1-1.)¹ The cover letter, appended to the Appraisal,² states that "[t]his [enclosed] appraisal will reportedly be used to assist SunTrust Bank and PNC Bank in establishing the value for mortgage collateral/asset management purposes." (Id. at 5.) The cover letter also states:

This confidential report is prepared for the use and benefit of SunTrust Bank and is based, in part, upon documents, writings, and information owned and possessed by SunTrust Bank. This report is provided for informational purposes only to third parties authorized to receive it. The appraiser-client relationship is with SunTrust Bank as the client. This report should not be used for any purpose other than to understand the information available to the Bank concerning this property. SunTrust Bank assumes no responsibility if this report is used in any other manner.

PNC Bank, National Association, its employees, agents, successors and assigns may rely upon this report in evaluating a request for an extension of credit to be secured by the property (the 'Mortgage Loan'). This report may also be used and relied upon by any actual or prospective purchaser, transferee, assignee, or servicer of the Mortgage Loan (or any portion thereof), any actual or prospective investor (including agent or advisor) in any securities evidencing a beneficial interest in or backed by the Mortgage Loan (or any portion thereof), any rating agency actually or prospectively rating any such securities, any indenture trustee, and any institutional provider(s) from time to time of any liquidity facility or credit support for such financing. In addition, this report or a reference to this report may be included or quoted in any offering circular, private placement memorandum, registration statement or prospectus and Birch REA Partners, Inc. agrees to cooperate in answering questions by any of the above parties in connection with a securitization or transaction involving the Mortgage Loan (or any portion thereof) and/or such securities. This report has no other purpose and should notbe relied upon by any other person or entity.

(Id. at 5-6). Moreover, the letter states, "The value estimates and subsequent appraisal report are intended for the information of SunTrust Bank ('SunTrust') and PNC Bank ('PNC')." (Id. at 6). The Appraisal itself states that the Defendant "certif[ies] that, to the best of our knowledge and beliefs: we have complied with SunTrust Bank and PNC Bank's instructions, standards, and specifications in conducting the research and analysis, and formulating the value conclusion." (Id. at 161.) Within a section captioned "Purpose & Function of Appraisal," the Appraisal states: "It is intended that this appraisal will serve as a guide to SunTrust Bank and PNC Bank with respect to asset management/mortgage collateral purposes." (Id. at 27.) Within a section captioned "Description of Assignment," the Appraisal states that it "is to serve as a guide to SunTrust Bank and PNC Bank with respect to asset management/mortgage collateral purposes." (Id. at 113.)

On October 19, 2007, PNC Bank approved the loan, and on December 20, 2010, the Plaintiff purchased the Mortgage Loan. (Compl. ¶¶ 11-12.) On February 19, 2016, after the Plaintiff received a 2016 appraisal on the property, the Plaintiff determined that the Defendant's Appraisal overstated the value of the property because it concealed a prior sale of the property, cherry-picked comparable properties to determine the property's value when those other properties were not similar to the property at issue, and disregarded market conditions of a declining population and significant losses of manufacturing companies that support the market in which the property is located, inter alia. (Id. ¶¶ 22-27.)

Consequently, on July 7, 2016, the Plaintiff filed a lawsuit against the Defendant alleging four separate causes of action: First, the Plaintiff alleges that the Defendant acted negligently because the "Defendant, as a professional appraiser, owed a duty of care" to the Plaintiff, theDefendant "breached that duty of care by providing a grossly inaccurate appraisal with inflated values" and using methods that did not comply with the Uniform Standards of Professional Appraisal Practice ("USPAP") and Title XI of the Federal Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), and therefore caused the Plaintiff damages. (Id. ¶¶ 30-33.) Second, the Plaintiff alleges that the Defendant's Appraisal constitutes a negligent misrepresentation because the "Defendant failed to disclose material facts to the Plaintiff regarding its improper appraisal methods" and "intended that PNC Bank (and its successors and assigns) would rely upon and be induced by the misrepresentations to purchase the Mortgage Loan." (Id. ¶¶ 35-39.) Third, the Plaintiff alleges that the Defendant "knowingly and/or recklessly engaged in . . . a course of business which operated as a fraud upon Regent Bank. . . ." (Id. ¶ 41.) Finally, the Plaintiff alleges that the Defendant breached its contract with SunTrust Bank and/or PNC Bank and, as PNC Bank's successor in interest, the Plaintiff is a third party beneficiary who suffered "foreseeable damages on the Mortgage Loan as a direct result of the Defendant's breach of the contract." (Id. ¶¶ 50-54.)

STANDARD OF REVIEW

"A motion to dismiss pursuant to [Rule] 12(b)(6) challenges the viability of a complaint by arguing that it fails to state a claim upon which relief may be granted." Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014). When reviewing a complaint attacked by a Rule 12(b)(6) motion, the Court must accept all of the factual allegations as true and draw all reasonable inferences in the light most favorable to the Plaintiff. Erickson v. Pardus, 551 U.S. 89, 93 (2007). The Complaint need not contain detailed facts, but surviving a Rule 12(b)(6) motion "requires more than labels and conclusions . . . . Factual allegations must be enough toraise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). "A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). Because the purpose of a Motion to Dismiss "is to test the factual sufficiency of the statement of the claim for relief; the motion is not a procedure for resolving a contest between the parties about the facts or the substantive merits of the plaintiff's case." 5B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1356 (3d ed.).

The Court has jurisdiction over this case through diversity jurisdiction, 28 U.S.C. § 1332, therefore it "must apply the law of the state as it believes the highest court of the state would apply it if the issues were presently before that tribunal." State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666, 669 (7th Cir. 2001). Moreover, "[w]hen the state Supreme Court has not decided the issue, the rulings of the state intermediate appellate courts must be accorded great weight, unless there are persuasive indications that the state's highest court would decide the case differently." Id. Here, both parties agree that Indiana law applies.

ANALYSIS

A Professional Negligence and Breach of Contract - Third Party Beneficiary (Counts I and IV)

Count IV of the Plaintiff's Complaint seeks relief against the Defendant for breach of contract, pursuant to the Plaintiff's assertion that it was a third party beneficiary of the contract between the Defendant and SunTrust. The Plaintiff must allege the following elements in order to plead a third party beneficiary claim: (1) the intent to benefit the Plaintiff in the contract is clear, (2) the contract imposes a duty on one of the contracting parties in favor of the Plaintiff,and (3) the performance of the terms necessarily renders to the third party a direct benefit intended by the parties to the contract. Bowman v. Int'l Bus. Machs. Corp., 853 F. Supp. 2d 766, 769 (S.D. Ind. 2012) (citing Indiana law).

Count I of the Plaintiff's Complaint seeks relief against the Defendant for...