Gicu Rautu v. U.S. Bank

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0107n.06
No. 13-1436
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
Feb 06, 2014
DEBORAH S. HUNT, Clerk
GICU RAUTU, )
)
Plaintiff–Appellant, ) ON APPEAL FROM THE
) UNITED STATES DISTRICT
v. ) COURT FOR THE EASTERN
) DISTRICT OF MICHIGAN
U.S. BANK, )
)
Defendant–Appellee. ) OPINION
)
Before: BOGGS, MOORE, and McKEAGUE, Circuit Judges.
KAREN NELSON MOORE, Circuit Judge. The foreclosure crisis has taken a
tremendous toll on our country. Numerous foreclosures have stalled the economy by impeding
capital allocation and clouding title on real estate. The resulting court cases have flooded both
state and federal courts, which must resolve these cases expeditiously in order to unwind the
individual contractual tangles and, thus, help clean up the greater financial mess.
Gicu Rautu claims that when he purchased a home in January 2008, he was promised a
fixed-rate mortgage. The documents he signed at closing, however, provided for an adjustable-
rate mortgage. Rautu claims that he has been harmed as a result of this alleged bait-and-switch.
His complaint, however, failed to plead fraud with any particularity. The district court dismissed
Rautu’s suit for this, as well as a number of other failings. For the reasons that follow, we
AFFIRM that dismissal.
No. 13-1436
Rautu v. U.S. Bank
I. BACKGROUND
Gicu Rautu purchased a home in Birmingham, Michigan, in January 2008. In order to
finance his home purchase, Rautu obtained a mortgage from U.S. Bank through Indigo Financial
Group. Rautu applied for a fixed-rate mortgage and claims that he was assured that the mortgage
would indeed be a fixed-rate mortgage. When he was closing on the purchase and mortgage,
however, Rautu signed mortgage documents for an adjustable-rate mortgage. Consequently, he
claims to be a victim of a bait-and-switch fraud in which he received a product, an adjustable-
rate mortgage, for which he did not bargain. He also alleges that Indigo Financial Group
benefitted financially from selling him an adjustable-rate mortgage rather than a mortgage with a
fixed rate.
The adjustable-rate note provided for a 7.8% annual interest rate for the first five years of
the thirty-year loan-repayment period. At the end of the first five years, in February 2013, the
loan’s interest rate would effectively float between 7.8% and 13.8%. Rautu claims that he
believed he was getting a 7.8% annual interest rate fixed for the entire period of his thirty-year
loan. Accordingly, he professes to have been unaware that he was getting an adjustable-rate
rather than a fixed-rate mortgage.
Rautu began falling behind on his payments in late 2010 and continued to struggle to
make monthly payments in the beginning of 2011. In June 2011, Rautu and U.S. Bank entered
into a Home Affordable Modification Program (“HAMP”) trial period. After successful
completion of the trial period, Rautu and U.S. Bank executed a loan-modification agreement.
While this agreement included a greater unpaid balance than Rautu’s original loan, the annual
interest rate on this agreement was set at a fixed 4.8% for the duration of the loan. Under this
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loan modification, Rautu made one payment in September 2011, but has made no subsequent
payments.
Instead, Rautu filed suit against U.S. Bank in Oakland County, Michigan, Circuit Court
on October 27, 2011. U.S. Bank removed the case to the United States District Court for the
Eastern District of Michigan on February 21, 2012. By stipulation of the parties, that action was
dismissed without prejudice on April 3, 2012.
Soon thereafter, Rautu filed the present action once again in Oakland County Circuit
Court. The complaint, filed on May 31, 2012, raised six counts: (1) fraud and
misrepresentation, (2) common-law rescission and/or reformation, (3) quiet title, (4) violation of
the federal Truth in Lending Act (“TILA”) and Federal Reserve Regulation Z, (5) violation of
the Credit Repair Organizations Act (“CROA”), and (6) violation of the Michigan Mortgage
Brokers, Lenders, and Servicers Licensing Act. The first five counts were asserted against both
Indigo Financial Group and U.S. Bank. The sixth count was asserted against only Indigo
Financial Group, which the complaint identified as an “expired” corporation “no longer doing
business.” R. 1 (Compl. Caption, ¶ 7) (Page ID #9). U.S. Bank removed the case to the United
States District Court for the Eastern District of Michigan on July 6, 2012, with both federal-
question jurisdiction and diversity jurisdiction supporting the removal. U.S. Bank subsequently
filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure
12(b)(6).
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On March 7, 2013, the district court granted the motion to dismiss.1 The district court
provided a comprehensive opinion explaining its reasoning for dismissing each count. See R. 11
(Op. & Order Granting Def.’s Mot. to Dismiss (“D. Ct. Op.”)) (Page ID #129–42). The district
court dismissed Count 1 because Rautu “(i) failed to plead fraud with sufficient specificity, (ii)
was unreasonable in relying on [U.S. Bank]’s alleged misrepresentations, and (iii) cannot
demonstrate any harm arising from said misrepresentations.” Id. at 7 (Page ID #135). The
district court ruled that, because rescission and reformation are equitable remedies rather than
causes of action under Michigan law, Count 2 must be dismissed. Id. On Count 3, the quiet-title
count, the district court ruled that Rautu’s failure to honor the loan agreement sullied Rautu’s
hands. Consequently, Rautu is barred from entering a court of equity and asking for an equitable
remedy due to his unclean hands. Id. at 7–8 (Page ID #135–36). According to the district court,
the statute of limitations on any TILA or Regulation Z claim, Count 4, has long expired. Id. at 9
(Page ID #137). Finally, the district court rejected Count 5, Rautu’s claim that U.S. Bank
violated the CROA. Id. at 9–13 (Page ID #137–41). In doing so, the district court gave three
independently sufficient reasons: (1) the CROA does not regulate entities such as U.S. Bank, (2)
U.S. Bank did not make a misleading statement to a third party, and (3) the misleading statement
was never actually made as Rautu alleges. Id.2
1
On January 29, 2013, the district court had dismissed Indigo Financial Group from the
suit without prejudice in a Stipulated Order. R. 9 (Stipulated Order of Dismissal as to Def.
Indigo Fin. Grp., Only.) (Page ID #127). As a result, the district court dismissed the sixth count
of the complaint, violation of the Michigan Mortgage Brokers, Lenders, and Servicers Licensing
Act. See R. 11 (Op. & Order Granting Def.’s Mot. to Dismiss (“D. Ct. Op.”) at 1–2) (Page ID
#129–30). The parties do not dispute that the dismissal of this count was proper.
2
In his appeal, Rautu does not argue that the district court erred in dismissing Count 5.
Consequently, our review will focus solely on Counts 1–4.
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On April 5, 2013, Rautu filed a notice of appeal. In his appeal, Rautu argues that the
district court made four errors. First, he claims that his fraud claim should not have been
dismissed because he pleaded fraud with sufficient particularity, reasonably relied on U.S.
Bank’s misrepresentations, and was harmed. Second, he contends that the district court
misconstrued Michigan law and that rescission and reformation are causes of action under
Michigan law, not simply remedies. Third, he contends that the district court’s application of the
doctrine of unclean hands to bar him from pursuing equitable claims and remedies is overly
broad. Finally, he claims that the statute of limitations has not run on his TILA claim, or, in the
alternative, that the limitations period should be equitably tolled.
II. ANALYSIS
We review de novo a district court’s grant of a Rule 12(b)(6) motion to dismiss and its
conclusion that any amendment would be futile. Seaton v. TripAdvisor LLC, 728 F.3d 592, 596
(6th Cir. 2013). “To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007)). In ruling on a 12(b)(6) motion, courts must look only to the complaint and any
documents that are referred to in the complaint and are central to the claim. Weiner v. Klais &
Co., 108 F.3d 86, 88–89 (6th Cir. 1997).
A. Fraud and Misrepresentation
Federal Rule of Civil Procedure 9(b) requires that “[i]n alleging fraud . . ., a party must
state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). Rule 9(b) has
been interpreted to require that a plaintiff, at a minimum, must provide “the time, place and
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contents of the misrepresentation(s) upon which he relied.” Bender v. Southland Corp., 749 F.2d
1205, 1216 (6th Cir. 1984). To assure that they have satisfied the Rule 9(b) requirements,
plaintiffs should strive to specify the statement they contend is fraudulent, identify the speaker,
time, and location of the statement, and explain why the statement is indeed untrue or a
misrepresentation. See Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir. 2008).
Rautu’s complaint does not come close to meeting this standard because it lacks any
detail regarding the alleged fraud or misrepresentation. Rautu, in his complaint, alleges that
“Defendant’s representations, both verbal and through their [sic] disclosures, up to and through
closing, made material representations to plaintiff regarding the nature of the loan. Defendant
intended for plaintiff to rely upon the representations. These representations were false at the
time, or made with reckless disregard as to their truth.” R. 1 (Compl. ¶¶ 17–19) (Page ID #10).
This set of allegations says simply that the defendant3 made material misrepresentations to Rautu
intending for Rautu to rely on them. It does not state when or where the misrepresentations were
made. It simply states that they were made during the entirety of the relationship in forming the
contract. It also does not state the content of the misrepresentations—any specific statement
made by any individual or on any form that is false or misleading. The closest Rautu comes to
providing U.S. Bank with any notice of the nature of the charges against it is by stating that
“[t]hese representations changed the entire nature of the financing transaction.” Id. ¶ 20 (Page
ID #10).
3
Because Rautu sued both U.S. Bank and Indigo Financial Group, it is not even clear
whether the fraud and misrepresentations are alleged to have been undertaken by one defendant,
and, if so, which one, or by both defendants. The words “[d]efendant’s” and “defendant” are
singular while “their” is plural.
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Relying on the general allegations in the complaint, a defendant may be able to figure out
that this statement is intended to reflect that Rautu “applied for a fixed[-rate] loan,” id. ¶ 11
(Page ID #9), but “was made the victim of a ‘bait and switch’ and placed in an Adjustable Rate
Mortgage (“ARM”) without any prior knowledge.” Id. ¶ 14 (Page ID #9). While this may
provide detail on the nature of Rautu’s theory of recovery, it lacks any detail on why Rautu
expected to receive a fixed-rate loan. An adequate complaint would explicitly state which oral
statements by representatives of the defendant or which written disclosures by the defendant led
Rautu to believe that his loan would be a fixed-rate loan. Provided with the time, place, and
contents of these statements, U.S. Bank would then have a fair opportunity to reply. Perhaps,
U.S. Bank would answer that such statements were never made. Perhaps, it would argue that the
statements were later repudiated. Perhaps, it would argue that the statements were not made with
the intent that Rautu rely on them. U.S. Bank might even admit the truth of a statement.
However, with the complaint as it is drafted, U.S. Bank simply has no concrete statements to
which it can reply. It has not been put on notice of the nature of the fraud it is alleged to have
committed.
In effect, Rautu’s complaint states that he applied for one type of loan—a fixed-rate loan.
He was then offered a different type of loan—an adjustable-rate loan. He signed the documents
for the latter—perhaps without reading them—and, thus, he alleges that a bait-and-switch had
occurred. This set of events may provide a cautionary tale for consumers to examine the loan
documents they are signing—particularly for loans of over $400,000—but it does not state a
claim for fraud or misrepresentation.
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Moreover, U.S. Bank in its motion to dismiss in the district court and in its brief before
this appellate panel has pointed out this shortcoming of the complaint, and Rautu has shown no
ability to correct it by providing the requisite detail. We conclude that Rautu is unable to remedy
this failing, and we affirm the dismissal of Count 1 for failure to plead fraud with particularity.
The district court also dismissed Count 1 of the complaint for two other reasons: (1) it
held that Rautu signed mortgage documents that clearly stated that he was getting an adjustable-
rate mortgage, and, thus, any reliance by him on previous promises that his mortgage would be
for a fixed rate was unreasonable; and (2) it determined that Rautu suffered no damages because
his annual interest rate never increased above the 7.8% fixed rate he was expecting to receive.
Because we have found that the complaint fails to plead fraud with sufficient particularity, we
have no reason to reach the district court’s other two bases for dismissing Count 1—lack of
reasonable reliance and lack of harm.
B. Rescission and Reformation and Quiet Title
The district court, relying on Yaldu v. Bank of America Corp., 700 F. Supp. 2d 832, 847
(E.D. Mich. 2010) (stating that “[r]escission and reformation are not separate causes of action;
rather, they are equitable remedies”), dismissed Count 2 of Rautu’s complaint for failure to state
a claim. R. 11 (D. Ct. Op. at 7) (Page ID #135). Rautu now argues that rescission and
reformation are causes of action under Michigan law.
In Count 3, Rautu puts forward a quiet-title claim, requesting that the court use its
equitable power to vindicate his rights. The district court determined that Rautu’s “failure to
honor the terms of the loan agreement” sullied his hands. Id. at 8 (Page ID #136).
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Consequently, the doctrine of unclean hands “bars [Rautu] from asserting a quiet-title action.”
Id.4
This panel does not have to interpret Michigan law to determine whether rescission and
reformation are causes of action or merely equitable remedies because Rautu’s equitable
claims—reformation and rescission and the quiet title cause of action—fail as causes of action.
On both Count 2 and Count 3, Rautu requests that the court use its equitable power to change the
relationship between himself and U.S. Bank with respect to the home and mortgage. His stated
reason for why the court should take this action is because of the fraud and misrepresentation
committed by U.S. Bank. See R. 1 (Compl. ¶ 24) (Page ID #10) (basing the rescission and
reformation counts on the allegation that “[d]efendant materially misrepresented to plaintiffs
(sic) the true nature of the financing”); id. ¶ 32 (Page ID #11) (arguing that the court should act
on the quiet title claim because “defendants’ security interest in the home was obtained by fraud
in the inducement”). Even Rautu’s opposition to the motion to dismiss clearly predicated any
equitable remedy found in Count 2 or Count 3 on “the fraud committed by defendants, and
request[ed] their respective types of equitable relief.” R. 5 (Pl.’s Resp. Opp’n Def.’s Mot.
Dismiss 10) (Page ID #117). As we have noted above, however, Rautu fails to allege the nature
of this fraud with sufficient particularity and does not provide any factual details on the
substance of the misrepresentations, who made them, when and where they were made, or any
4
U.S. Bank made this argument in its motion to dismiss before the district court, and the
district court accepted it. Rautu’s response to the motion to dismiss failed to address this
argument. Having failed to address the doctrine of unclean hands below, he has forfeited the
argument. See Dealer Computer Servs., Inc. v. Dub Herring Ford, 623 F.3d 348, 357 (6th Cir.
2010).
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other salient facts. Consequently, Rautu’s complaint is inadequate to state a claim upon which
relief may be granted. We affirm the district court’s dismissals of Count 2 and Count 3.
C. TILA Statute of Limitations
The district court dismissed Count 4 of Rautu’s complaint—violation of TILA—as being
barred by TILA’s statute of limitations. R. 11 (D. Ct. Op. at 9) (Page ID #137). Indeed, “any
action under [TILA] may be brought in any United States district court, or in any other court of
competent jurisdiction, within one year from the date of the occurrence of the violation.” 15
U.S.C. § 1640(e). The violation occurred at the time of the alleged bait-and-switch in January
2008, but Rautu did not file his first suit until October 2011. Consequently, his suit is barred by
the statute of limitations. See id. Today, Rautu argues that he filed suit within a year of
discovering the violation and, alternatively, he asks for equitable tolling. However, Rautu has
not alleged when he discovered that his loan agreement included an adjustable, rather than a
fixed, rate. Moreover, he has not alleged what precluded him from discovering this fact from the
loan documents he signed. Finally, in his opposition to the motion to dismiss below, Rautu did
not respond to U.S. Bank’s argument that his TILA claim was barred by the statute of
limitations. Because in front of the district court Rautu did not argue for a later date of discovery
of the TILA violation or that the statute of limitations should be equitably tolled, he has forfeited
these arguments. See Dealer Computer Servs., Inc. v. Dub Herring Ford, 623 F.3d 348, 357 (6th
Cir. 2010). We affirm the district court’s dismissal of Count 4.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the district court.
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