Boomer Development, LLC v. National Association of Home Builders of the United States

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
BOOMER DEVELOPMENT, LLC, et al., :
:
Plaintiffs, : Civil Action No.: 16-2225 (RC)
:
v. : Re Document No.: 10
:
NATIONAL ASSOCIATION OF HOME :
BUILDERS OF THE UNITED STATES, :
:
Defendant. :
MEMORANDUM OPINION
GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS
I. INTRODUCTION
Beginning in 2014, the National Association of Home Builders of the United States
(“NAHB”), a Nevada nonprofit trade association, allegedly began promoting a loan program
offered by North Star Finance LLC (“North Star”) to NAHB members and prospective members.
Compl. ¶¶ 9, 13–14, ECF No. 1–13. Under the program, members were allegedly offered non-
recourse debt financing for building projects up to $10 million at attractive interest rates and with
other favorable terms. Compl. ¶ 13. Plaintiffs, who were members or prospective members of
NAHB, allege that they applied to the loan program and paid application fees ranging from
$30,000 to $190,000 in reliance on representations made by NAHB, which they claim suggested
NAHB had reviewed and approved of North Star. 1 See Compl. ¶¶ 83, 102, 125–28. Ultimately,
1
The ten Plaintiffs that have brought this action are Boomer Development, LLC
(“Boomer”), Sierra’s Glen Partners II and Sierra’s Glen Partners V, LP (collectively “Sierra’s
Glen”), Cotswold Homes, LLC and Skywatch Group (collectively “Skywatch”), Davis
Contracting and Development, Inc. (“Davis”), Biltmore Development LLC (“Biltmore”),
Bloomfield Construction, Inc. (“Bloomfield”), Thomas Dostal Developers, Inc. (“Dostal”), and
Concord Development Co., LLC (“Concord”). Compl. ¶¶ 1–8.
however, North Star’s financing never materialized because that program was, in reality, a
fraudulent investment scheme carried out by North Star. See Compl. ¶¶ 28–29. In addition to
losing monies paid for application fees, Plaintiffs also claim they lost expected profits and
incurred development costs in connection with construction projects that they were unable to
complete in the absence of the promised financing. Compl. ¶ 128. In June 2016, Plaintiffs filed
this lawsuit, not against North Star, but directly against the NAHB for fraudulent
misrepresentation (Count I), negligent misrepresentation (Count II), breach of fiduciary duty
(Count III), and fraudulent inducement (Count IV), Compl. at 20–24, though Plaintiffs later
conceded their fraudulent inducement claims,2 Pls.’ Opp’n at 22, ECF No. 20.
This matter now comes before the Court on Defendant’s motion to dismiss pursuant to
Rule 12(b)(6) of the Federal Rules of Civil Procedure. See generally Def.’s Mot. to Dismiss,
ECF No. 10. For the reasons below, the Court grants the motion in part and denies the motion in
part; dismissing without prejudice the fraudulent and negligent misrepresentation claims (Counts
I and II) as to Plaintiffs Boomer, Davis, Biltmore, Bloomfield, and Dostal and dismissing the
breach of fiduciary duty claims (Count III) in their entirety without prejudice.
II. FACTUAL BACKGROUND3
In late 2013 and early 2014, the NAHB, a Nevada nonprofit trade association with its
principal place of business in Washington, D.C., entered into an agreement with North Star to
offer a financing program for current and prospective members of the NAHB. Compl. ¶¶ 9, 13.
Under the program, members could obtain non-recourse debt financing for projects up to $10
2
For this reason, the Court formally dismisses Count IV.
3
At the motion to dismiss stage, the Court accepts the plaintiff's factual allegations as
true. See, e.g., United States v. Philip Morris, Inc., 116 F. Supp. 2d 131, 135 (D.D.C. 2000).
2
million at interests rates that were at or below available market rates and included other
favorable terms. Compl. ¶ 13.
NAHB first announced the North Star program in February 2014 at the NAHB’s annual
Home Builders Show in Las Vegas, Nevada. See Compl. ¶¶ 14–15. The program was
introduced at various points throughout the Show by prominent NAHB representatives. Compl.
¶¶ 15–16. Indeed, among others, the program was touted by Rick Judson, the Chairman of
NAHB’s Board of Directors and the supposed first loan applicant of the North Star program, and
by Thomas Vetter, an NAHB Executive Board Member who the NAHB awarded a Lifetime
Achievement Award in the area of building finance at the conference. Compl. ¶ 16. During the
presentations, attendees were told that the program was an NAHB program available only to
NAHB members and that, if they were interested in applying, they should provide their contact
information to NAHB personnel. Compl. ¶ 17–18. Attendees were also advised that NAHB and
North Star intended to enter into an “affinity” program whereby the NAHB would receive a
share of the application fees that loan applicants paid to North Star. Compl. at ¶ 19. Plaintiffs
allege their belief that NAHB and North Star ultimately entered into such an arrangement. See
Compl. ¶ 19. The NAHB also permitted North Star to indicate on its website that the North Star
program was being “conducted in conjunction with and under the auspices of the NAHB.”
Compl. ¶ 20.
Following the conference, the NAHB continued to promote and disseminate information
about the North Star program to its members and others. The NAHB provided information about
the program to its state and local affiliates and recommended that they refer any interested
persons to NAHB for additional details. Compl. ¶ 21. When contacted, the NAHB provided
information about the program, instructed interested persons on how to contact North Star to
3
apply, and also provided certain assurances. Compl. ¶ 23. According to the Complaint, the
NAHB assured many of the Plaintiffs, either before or after they applied for loans, of the
“soundness,” “integrity[,] and safety of the North Star program.” Compl. ¶¶ 22, 50, 51, 60, 85,
106, 116. Furthermore, some Plaintiffs allege that the NAHB claimed that it was “well informed
about the North Star program,” Compl. ¶¶ 22, 103, or that “the North Star program had been
vetted by the NAHB,” Compl ¶ 111. These alleged representations were made by senior NAHB
officers and directors, including Mr. Judson, Mr. Vetter, Rebecca Froass, a Director for NAHB’s
Financial Institutions and Capital Markets, and Richard Krump, legal counsel to NAHB, via
telephone conversations and email correspondence. See Compl. ¶¶ 22, 50, 51, 60, 85, 103, 106,
111, 116. According to Plaintiffs, the NAHB both intended and expected that its various actions
endorsing the North Star program would result in NAHB members and prospective members
applying to the program because it was being offered at a time when “conventional financing at
reasonable rates was generally not available for home building projects costing up to $10
million.” Compl. ¶¶ 26 121–123. Despite the NAHB’s general promotion of the North Star
program or its assurances concerning its soundness, the NAHB had never undertaken any
reasonable steps to confirm independently the qualifications of North Star’s operators, the
accuracy of North Star’s representations about the program, or the merits of the program
generally. Compl. ¶ 25.
The ten Plaintiffs in this case allege that they applied for the North Star program and
paid substantial fees to North Star and an associated firm, called Capital Source Funding
(“Capital Source”), in reliance on various representations made by the NAHB. See Compl.
¶¶ 39, 53, 58, 63–64, 74, 83, 92–93, 101–102, 115, 125–127. According to Plaintiffs, these
representations suggested that “the NAHB had reviewed and approved of the North Star
4
program.” Compl. ¶ 125. The Plaintiffs then spent months attempting to obtain the loan
proceeds, but the North Star financing never materialized. See Compl. ¶¶ 40, 55, 66, 77, 87, 96,
108, 118. Although Capital Source agreed to refund portions of the Plaintiffs’ application fees,
North Star refused to provide Plaintiffs with any refunds whatsoever. See Compl. ¶¶ 40, 55, 66,
77, 87, 96, 108, 118. In May 2015, it was revealed that the North Star program was, in reality, a
fraudulent investment scheme when the Securities and Exchange Commission filed a federal
lawsuit against North Star and others. Compl. ¶ 28.
On June 21, 2016, Plaintiffs commenced this suit against the NAHB in the Pennsylvania
Court of Common Pleas alleging intentional misrepresentation, negligent misrepresentation,
breach of fiduciary duties, and fraudulent inducement. See Compl. at 20–24. The NAHB
subsequently removed the action to the United States District Court for the Middle District of
Pennsylvania on July 11, 2016, invoking diversity jurisdiction under 28 U.S.C. § 1332. See
Notice of Removal at 2, ECF No. 1. Thereafter, on August 1, 2016, NAHB filed a motion to
dismiss the action for improper venue, lack of jurisdiction, and for failure to state a claim under
Rules 12(b)(2), 12(b)(3), and 12(b)(6) of the Federal Rules of Civil Procedure. See Def.’s Mot.
to Dismiss, ECF No. 10. In the course of briefing that motion, Plaintiffs conceded their
fraudulent inducement claims. See Pls.’ Opp’n at 22. Once the motion was fully briefed, the
district court concluded that it did not have personal jurisdiction over the NAHB, but declined to
dismiss the case, finding that such dismissal would not be in the interests of justice. See Mem. at
11–12, ECF No. 24. Instead, it transferred the matter to this Court pursuant to 28 U.S.C. § 1631
after it determined that jurisdiction existed and that venue was proper. See Mem. at 11–12.
Because the district court did not have jurisdiction over the matter, it did not reach the merits of
5
Defendant’s motion under Rule 12(b)(6) and deferred the resolution of that part of the motion to
this Court. See Order at 1, ECF No. 25.
III. ANALYSIS
NAHB has moved to dismiss the three remaining counts of Plaintiffs’ Complaint
pursuant to Federal Rule of Civil Procedure 12(b)(6). As described below, the Court grants the
motion in part and denies the motion in part, dismissing Counts I and II with respect to Plaintiffs
Boomer, Davis, Bloomfield, Biltmore, and Dostal and dismissing Count III in its entirety.
A. Choice of Law
Before reaching the merits of the NAHB’s motion, the Court must first determine which
state’s laws should govern Plaintiffs’ claims. In cases transferred pursuant 28 U.S.C. § 1631,
“the action or appeal shall proceed as if it had been filed or noticed for the court to which it is
transferred . . .” 28 U.S.C. § 1631. In such cases, federal courts “apply the choice-of-law rules
of the forum state—here, the District of Columbia.” In re APA Assessment Fee Litig., 766 F.3d
39, 51 (D.C. Cir. 2014). The District of Columbia “employ[s] a modified governmental interests
analysis which seeks to identify the jurisdiction with the most significant relationship to the
dispute.” Washkoviak v. Student Loan Mktg. Ass’n, 900 A.2d 168, 180 (D.C. 2006) (citations
omitted). Under this approach, a court must first “determine whether a ‘true conflict’ exists—
that is, whether more than one jurisdiction has a potential interest in having its law applied and,
if so, whether the law of the competing jurisdictions is different.” GEICO v. Fetisoff, 958 F.2d
1137, 1141 (D.C. Cir. 1992) (citing Eli Lilly & Co. v. Home Ins. Co., 764 F.2d 876, 882 (D.C.
Cir. 1985); Fowler v. A & A Co., 262 A.2d 344, 348 (D.C. 1970)). If “there is no ‘true conflict’”
among the purportedly interested jurisdictions, and where one of those jurisdictions is the
District of Columbia, a court will “apply the law of the District of Columbia by default.”
6
GEICO, 958 F.2d at 1141 (citing Fowler, 262 A.2d at 348; Restatement (Second) of Conflict of
Laws § 186 cmt. c (Am. Law Inst. 1971)). But if a “true conflict” does exist, “the court must go
on to determine which of the relevant jurisdictions has the ‘more substantial interest’ in having
its law applied to the case under review.” GEICO, 958 F.2d at 1141 (citation omitted). To make
that determination, a court must consider the four significant relationship factors “enumerated in
the Restatement (Second) of Conflict of Laws § 145” which are: (1) “the place where the injury
occurred,” (2) “the place where the conduct causing the injury occurred,” (3) “the domicile,
residence, nationality, place of incorporation and place of business of the parties,” and (4) “the
place where the relationship is centered.” District of Columbia v. Coleman, 667 A.2d 811, 816
(D.C.1995) (quoting Restatement (Second) of Conflict of Laws § 145). In cases involving
multiple claims, a court “need not decide all issues under a single jurisdiction’s law.” Paxton v.
Wash. Hosp. Ctr. Corp., 991 F. Supp. 2d 29, 31 (D.D.C. 2013); see also Logan v. Providence
Hosp., Inc., 778 A.2d 275, 280 (D.C. 2001) (“[D]ifferent law may apply to different issues in a
lawsuit.”).
Here, the Court finds that it is appropriate to apply Nevada law to Plaintiffs’ breach of
fiduciary duty claims and D.C. law to Plaintiffs’ fraudulent and negligent misrepresentation
claims. Nevada law governs Plaintiffs’ breach of fiduciary duty claims because Nevada, as the
state where the NAHB is incorporated, has the most substantial interest in those claims. The
District of Columbia, like most other states, adheres to the choice of law principle known as the
“internal affairs doctrine.” Under that doctrine, the District of Columbia applies the law of the
state of incorporation with respect to claims involving an organization’s corporate governance
and internal affairs. See, e.g., Labovitz v. Wash. Times Corp., 900 F. Supp. 500, 503
(D.D.C.1995) (“When a particular claim addresses matters of corporate governance or other
7
internal affairs of the organization, most states apply the law of the state where the corporation is
incorporated, and the District of Columbia follows suit.”) (citations omitted); see also Edgar v.
MITE Corp., 457 U.S. 624, 645 (1982) (describing the doctrine as “a conflict of laws principle
which recognizes that only one State should have the authority to regulate a corporation’s
internal affairs”). The District of Columbia recognizes that the “state of incorporation has a
strong interest in having its law applied to matters of corporate governance and other internal
affairs for the obvious reason that the corporation exists under its laws.” Labovitz, 900 F. Supp.
at 503 (D.D.C. 1995). Here, the sole basis for the parties’ alleged fiduciary relationship is the
Plaintiffs’ membership in the NAHB. Because this claim concerns the existence and extent of
the fiduciary duties that the NAHB owes to members of its nonprofit trade association and the
NAHB is incorporated in Nevada, this Court must apply Nevada law. See Edgar, 457 U.S. at
645 (explaining that internal affairs doctrine applies to matters “peculiar to the relationships
among or between the corporation and its current officers, directors, and shareholders”).
Determining the law to apply to Plaintiffs’ fraudulent and negligent misrepresentation
claims, however, is more complicated. Under the facts alleged in the Complaint, there are ten
jurisdictions with potential interests in having their laws applied: the District of Columbia (where
NAHB’s principal place of business is located), Nevada (where NAHB is incorporated and
where NAHB first announced the North Star program), and eight other states where the Plaintiffs
maintain their principal places of business.4 See Compl. ¶¶ 1–9, 14. Each of these jurisdictions
has an equally powerful interest in having its laws applied because, while the states where the
Plaintiffs reside have “a powerful interest in protecting [their] residents from fraud and
4
Those states are Florida, Georgia, Iowa, Michigan, Minnesota, New York,
Pennsylvania, and Texas. Compl. ¶¶ 1–8.
8
misrepresentation,” the District of Columbia and Nevada have “an equally strong interest in
ensuring that [their] corporate citizens refrain from fraudulent activities.” Washkoviak, 900 A.2d
at 180–81.
Despite the large number of potential jurisdictions, neither party has made any attempt to
identify which state’s laws govern these claims. Indeed, the NAHB expressly noted in its
memorandum in support of its motion that it had “not engaged in an exhaustive analysis of the
tort law in all states whose laws could conceivably apply,” opting instead to cite cases from
“jurisdictions that appear to be consistent with the prevailing law in most states.” Def.’s Mem.
Supp. Mot. to Dismiss at 14 n.10, ECF No. 11 (“Def.’s Mem.”). Plaintiffs similarly did not
address the choice of law inquiry nor did they dispute the NAHB’s citation to the general
“prevailing law.” See generally Pls.’ Opp’n. Even after the case was transferred, both parties
continued to agree that the motion was “fully briefed and ripe for consideration and resolution by
this Court.” Joint Status Report ¶ 2, ECF No. 32. Because the parties appear to be content
relying on the “prevailing law,” instead of the laws of any particular state or states, the Court
understands the parties to have assumed that there is no “true conflict” among the jurisdictions
and deems the parties to have waived any argument to the contrary for purposes of this motion.
See CSX Transp., Inc. v. Commercial Union Ins. Co., 82 F.3d 478, 482–83 (D.C. Cir. 1996)
(parties may waive choice-of-law arguments); C & E Servs., Inc. v. Ashland, Inc., 498 F. Supp.
2d 242, 255 n.5 (D.D.C. 2007) (same). Where parties make such assumptions with respect to
matters pertaining to choice of law, the Court need not second-guess them. See In re Korean Air
Lines Disaster of Sept. 1, 1983, 932 F.2d 1475, 1495 (D.C. Cir. 1991) (“[C]ourts need not
address choice of law questions sua sponte”); Davis v. Grant Park Nursing Home LP, 639 F.
Supp. 2d 60, 65 (D.D.C. 2009) (explaining that, where all parties assume that D.C. law applies,
9
“[t]he Court need not and does not question the parties’ assumptions on that point”). Thus, in the
absence of a “true conflict,” it is appropriate to apply D.C. law by default. See GEICO, 958 F.2d
at 1141 (applying D.C. law because “there is no ‘true conflict’” among the jurisdictions).
However, for the avoidance of doubt, the Court finds that it would still be appropriate to
apply D.C. law even if it were to assume that some true conflict existed because, on balance, the
four significant relationship factors enumerated in the Restatement (Second) of Conflict of Laws
§ 145 do not clearly point to any particular jurisdiction. The first factor—the place where
Plaintiffs’ injuries occurred—weighs in favor of applying the laws of the states where the
Plaintiffs reside. In a typical misrepresentation case, the injury occurs where the plaintiff
“received the alleged misrepresentations” or made the alleged payments. See Washkoviak, 900
A.2d at 181. Here, the Plaintiffs allege that they relied upon misrepresentations that the NAHB
made via telephone or email.5 See Compl. ¶¶ 37–38, 45–46, 49–51, 59–60, 70–71, 74–75, 82,
84–85, 104–106, 111–113. Although the Complaint does not specify where the Plaintiffs
received the telephone or email communications or where the Plaintiffs made their payments to
North Star, it is reasonable to infer that they occurred in the states where Plaintiffs maintain their
principal places of business. See In re APA Assessment Fee Litig., 766 F.3d 39, 54 (D.C. Cir.
2014) (“[T]he place of injury here was California, where the relevant subclass of plaintiffs
received their dues statements and presumably paid the special assessments.”); In re U.S. Office
Prod. Co. Sec. Litig., 251 F. Supp. 2d 77, 92 (D.D.C. 2003) (“[P]laintiffs’ financial losses most
likely occurred where they lived, though this is not specifically alleged in the complaint.”).
5
Although Plaintiffs allege that NAHB first announced the North Star program at
NAHB’s 2014 Home Builders Show in Las Vegas, Nevada, Compl. ¶¶ 14–15, they do not allege
that NAHB made any misrepresentations at the conference. Thus, this factor does not weigh in
favor of applying Nevada law.
10
Accordingly, the Court finds that the first factor weighs in favor of applying the laws of the
various states in which each of the Plaintiffs maintain their principal places of business.
The Court next considers “the place where the conduct causing the injury occurred” and
finds that this factor weighs moderately in favor of applying D.C. law. In cases such as this, both
the D.C. Court of Appeals and the D.C. Circuit have looked to the place where the statements at
issue were “formulated and transmitted.” See In re APA Assessment Fee Litig., 766 F.3d at 54;
Washkoviak, 900 A.2d at 181. Here, neither the Complaint nor the parties have suggested any
place where the NAHB conceived of any misrepresentation or any place from which it
transmitted misstatements through telephone calls or emails.6 However, the Complaint does
allege that NAHB maintains its principal place of business in Washington, D.C., Compl. ¶ 9, and
it is therefore reasonable to infer that NAHB either formulated or transmitted some or all of the
representations from there. As a result, the Court finds that this factor weighs at least moderately
in favor of D.C. law. See In re APA Assessment Fee Litig., 766 F.3d at 54 (holding that “second
factor weighs at least moderately towards D.C. law given that neither side has suggested any
other location where the conduct could have occurred” and complaint alleged only that
“defendants had their principal place of business in Washington, D.C. and that significant events
giving rise to this case took place in this District.”) (internal quotations omitted).
The third factor, which involves consideration of the parties’ residences and places of
business, does not weigh in favor of any jurisdiction. The NAHB is incorporated in Nevada with
its principal place of business in the District of Columbia and the ten Plaintiffs maintain their
6
As discussed above, Plaintiffs do not allege that NAHB made any misrepresentations at
NAHB’s 2014 Home Builders Show. Thus, the Court does not find that this factor weighs in
favor of applying Nevada law.
11
principal places of business across eight other states.7 See Compl. ¶¶ 1–9. Because all of the
parties hail from various locations across the United States, the Court finds that the third factor
“splits evenly” among the various jurisdictions. See In re APA Assessment Fee Litig., 766 F.3d
at 54.
Finally, the Court considers the fourth § 145 factor—“the place where the relationship, if
any, between the parties is centered”—and finds that it too does not favor any jurisdiction. In In
re APA Assessment Fee Litigation, the D.C. Circuit held that the fourth factor did not weigh
strongly in favor of any jurisdiction because “the parties cite[d] no case law directly addressing
where the relationship between a national nonprofit organization and its members [was]
‘centered.’” 766 F.3d at 54. Here, as in In re APA Assessment Fee Litigation, the parties have
neither advanced any argument nor pointed to any case law suggesting where the relationship
between NAHB, a national nonprofit organization, and its members is centered. Thus, the Court
finds that this factor also does not weigh in favor of any jurisdiction.
Because the § 145 factors, on balance, do not weigh in favor of any particular jurisdiction
or jurisdictions, D.C. law should be applied to Plaintiffs’ misrepresentation claims. In weighing
the various factors, the Court must compare and evaluate them on “a qualitative rather than
quantitative scale.” Washkoviak, 900 A.2d at 181 (citations omitted). Although the place-of-
injury factor weighs in favor of the states where the Plaintiffs maintain their principal places of
business, the District of Columbia courts give this factor less weight in fraud cases because the
7
The only two states that are shared by any of the Plaintiffs are Pennsylvania, where
Sierra’s Glen Partners II and Sierra’s Glen Partners V, LP maintain their principle places of
business, and Minnesota, where Cotswold Homes, LLC and Skywatch Group maintain theirs.
See Compl. ¶¶ 2–3. In each case, a single person was acting on behalf of the paired companies
and the same set of facts and circumstances gave rise to their alleged injuries. See Compl. ¶¶
42–67.
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“place of injury is less significant in the case of fraudulent misrepresentations” than “in the case
of personal injuries and of injuries to tangible things.” Washkoviak, 900 A.2d at 181–82. And
while the conduct-at-issue factor weighs in favor of the District of Columbia, it does so only
moderately “due to a dearth of factual allegations concerning the location of [NAHB’s]
conduct.” In re APA Assessment Fee Litigation, 766 F.3d at 54. Given that the third and fourth
factors also do not favor any jurisdiction, the Court cannot say that a qualitative weighing of the
relevant factors suggests any clear answer. D.C. law therefore applies because “D.C. choice-of-
law rules require, in a case where the [Restatement] factors do not point to a clear answer, that
we apply D.C. tort law, the law of the forum state.” Wu v. Stomber, 750 F.3d 944, 949 (D.C. Cir.
2014) (citation omitted); see also In re APA Assessment Fee Litigation, 766 F.3d at 54–55.
Having determined that Nevada law applies to Plaintiffs’ breach of fiduciary duty claims
and D.C. law applies to Plaintiffs’ misrepresentation claims, the Court now turns to the merits of
the NAHB’s motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure.
B. Legal Standard
The Federal Rules of Civil Procedure require that a complaint contain “a short and plain
statement of the claim” in order to give the defendant fair notice of the claim and the grounds
upon which it rests. Fed. R. Civ. P. 8(a)(2); accord Erickson v. Pardus, 551 U.S. 89, 93 (2007)
(per curiam). A motion to dismiss under Rule 12(b)(6) does not test a plaintiff’s ultimate
likelihood of success on the merits; rather, it tests whether a plaintiff has properly stated a claim.
See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), abrogated on other grounds by Harlow v.
Fitzgerald, 457 U.S. 800 (1982). A court considering such a motion presumes that the
complaint’s factual allegations are true and construes them liberally in the plaintiff’s favor. See,
e.g., United States v. Philip Morris, Inc., 116 F. Supp. 2d 131, 135 (D.D.C.2000). Nevertheless,
13
“[t]o 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 Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This means that a
plaintiff’s factual allegations “must be enough to raise a right to relief above the speculative
level, on the assumption that all the allegations in the complaint are true (even if doubtful in
fact).” Twombly, 550 U.S. at 555–56 (citations omitted). “Threadbare recitals of the elements of
a cause of action, supported by mere conclusory statements,” are therefore insufficient to
withstand a motion to dismiss. Iqbal, 556 U.S. at 678. A court need not accept a plaintiff’s legal
conclusions as true, see id., nor must a court presume the veracity of the legal conclusions that
are couched as factual allegations. See Twombly, 550 U.S. at 555.
Furthermore, when a plaintiff alleges fraud or negligent misrepresentation, as the
Plaintiffs in this case do, the complaint must “state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b); see, e.g., Jefferson v. Collins, 905 F. Supp.
2d 269, 286 (D.D.C. 2012); 3D Global Solutions, Inc. v. MVM, Inc., 552 F. Supp. 2d 1, 7–9
(D.D.C. 2008); Anderson v. USAA Cas. Ins. Co., 221 F.R.D. 250, 254 (D.D.C. 2004). This
heightened pleading standard requires a complaint to “state the time, place and content of the
false misrepresentations, the fact misrepresented and what was retained or given up as a
consequence of the fraud.” United States ex rel. Williams v. Martin-Baker Aircraft Co., 389 F.3d
1251, 1256 (D.C. Cir. 2004) (internal quotation marks omitted) (quoting Kowal v. MCI
Commc’ns Corp., 16 F.3d 1271, 1278 (D.C. Cir. 1994)). The plaintiff must also “identify
individuals allegedly involved in the fraud.” United States ex rel. Williams, 389 F.3d at 1256.
14
C. Fraudulent Misrepresentation (Count I)
Count One of Plaintiffs’ Complaint asserts common law claims against the NAHB for
fraudulent misrepresentation.8 Compl. ¶¶ 120–128. To establish a claim for fraudulent
misrepresentation under District of Columbia law, a plaintiff must allege: “(1) that a false
representation was made, (2) in reference to a material fact, (3) with knowledge of its falsity, (4)
with intent to deceive, and (5) action taken in detrimental reliance upon the representation.”
Sibley v. St. Albans Sch., 134 A.3d 789, 808–09 (D.C. 2016) (citation omitted). The NAHB
attacks the Plaintiffs’ claims on multiple grounds, which the Court addresses in turn.
1. False Representations of Material Fact
NAHB’s primary argument for dismissing the fraudulent misrepresentation claims is its
assertion that Plaintiffs have failed to adequately allege that the NAHB made any false
representations of material fact. See Def.’s Mem. at 15–19; Def.’s Reply at 2–5. “A false
representation may be either an affirmative misrepresentation or a failure to disclose a material
fact when a duty to disclose that fact has arisen.” Saucier v. Countrywide Home Loans, 64 A.3d
428, 438 (D.C. 2013) (quoting Rothenberg v. Aero Mayflower Transit Co., 495 F. Supp. 399, 406
(D.D.C.1980)). A misrepresentation is “material” if it is “likely to induce a reasonable person to
manifest his assent, or if the maker knows that it would be likely to induce the recipient to do
so.” Id. at 438–39 (quoting Sarete, Inc. v. 1344 U Street Ltd. P’ship, 871 A.2d 480, 493 (D.C.
2005) (citing Restatement (Second) of Contracts, § 162 (1981))). Although the non-disclosure of
material information may constitute fraud when there is a duty to disclose, “mere silence does
8
Although the Plaintiffs style their claim as “intentional misrepresentation” claims, the
substance of their claims equates to what the District of Columbia calls “fraudulent
misrepresentation.” The Court therefore uses the District of Columbia’s terminology to reflect
more accurately the law being applied.
15
not constitute fraud unless there is a duty to speak.” Id. at 439 (quoting Kapiloff v. Abington
Plaza Corp., 59 A.2d 516, 517 (D.C. 1948)).
Plaintiffs contend that NAHB made several misrepresentations that suggested to the
Plaintiffs that NAHB had “reviewed and approved of the North Star program when in fact it had
conducted no such review.” Compl. ¶ 125. First, many of the Plaintiffs allege that the NAHB
assured them of the “soundness,” “integrity[,] and safety of the North Star program” in
discussions that they had with NAHB representatives both before and after they applied for the
North Star Program.9 Compl. ¶¶ 50, 51, 60, 85, 106, 116. The NAHB argues, however, that
claims premised on these statements must fail because they represent statements of opinions,
rather than statements of material facts. Def.’s Mem. at 17; Def.’s Reply at 4 n.3. The Court
disagrees.
Typically, “[o]pinions or predictions of future events do not constitute representations of
material fact upon which a plaintiff successfully may place dispositive reliance.” Howard v.
Riggs Nat’l Bank, 432 A.2d 701, 706 (D.C. 1981). For example, in Howard v. Riggs National
Bank, the District of Columbia Court of Appeals agreed with the prevailing case law that,
generally, “defendants’ statements regarding third parties who ultimately fail to come up to
plaintiff’s expectations are not actionable in fraud.” Id. In that case, a customer of Riggs
National Bank attempted to bring a fraud action against the bank because a bank employee
assured her that a particular contractor’s “work product was ‘very good . . . very beautiful,’ when
she should have known that in fact, [the contractor] was not a reputable firm and ‘had defrauded
numerous individuals throughout the Washington area.” Id. at 706–07. The Court of Appeals
9
Specifically, Plaintiffs Sierra’s Glen, Skywatch, Biltmore, Dostal, and Concord have all
alleged receiving some variation of these assurances from the NAHB.
16
held, however, that the bank could not be liable for fraudulent misrepresentation because there
was nothing in the record suggesting that the bank acted in bad faith or knew about any
fraudulent behavior. Id. at 707. Furthermore, it held that “referrals do not amount to guarantees
by the one making the recommendation as to the quality of the work to be performed.”10 Id. at
707. The Court of Appeals noted, however, that its predecessor court, the D.C. Circuit, had
previously found that representations made by an “agent[ ] of a party to the transaction in
question” could rise to the level of a fraudulent misrepresentation if it “evinced a pretense that
his representation was true as a matter of fact.” Id. at 707 (citing Stein v. Treger, 182 F.2d 696,
699 (D.C. Cir. 1950)).11
Stein v. Treger, 182 F.2d 696 (D.C. Cir. 1950), is one such case. There, the defendants,
who were whiskey brokers, contacted a retail liquor dealer and informed him that they were
authorized to take whisky orders on behalf of a wholesale firm in Chicago. See id. at 697. The
retailer asked the brokers whether they had investigated the wholesale firm and they responded
that “they had investigated them, and they were financially all right.” Id. Relying on those
statements, among others, the retailer ordered six hundred cases of whisky from the wholesaler
through the defendant-brokers and paid a $6,000 deposit. See id. Plaintiff, however, only ever
received one hundred cases of whisky before the wholesaler encountered financial difficulties
and bankruptcy proceedings were initiated. See id. Despite the fact that the brokers’ assurance
that the wholesaler was “financially all right” ostensibly constituted an opinion, the D.C. Circuit
10
In addition, the court held that, even if the statements were false or misleading, the
plaintiff was not “entitled to place dispositive reliance” upon such statements because plaintiff
had an adequate opportunity to conduct an independent investigation of the contractor and
because this was not information that was held exclusively by the bank. Id. at 706–07.
11
In M.A.P. v. Ryan, 285 A.2d 310, 312 (D.C. 1971), the D.C. Court of Appeals held that
decisions by the D.C. Circuit rendered prior to February 1, 1971 “constitute the case law of the
District of Columbia” and may only be overruled by the D.C. Court of Appeals en banc.
17
held that the plaintiff “was entitled to rely upon the representations of the broker concerning their
principal’s financial standing.” Id. at 699.
Here, the NAHB’s alleged representations assuring Plaintiffs of the “soundness,”
“integrity[,] and safety of the North Star program” without undertaking any investigation of
North Star are actionable. This case presents two notable differences from Howard that
necessitate a different result. First, in Howard, the Court found that there was no evidence that
the bank acted in bad faith because the bank had a basis for its representation. See Howard, 432
A.2d at 707. Here, on the other hand, the Plaintiffs’ claims are premised on the notion that the
NAHB made representations concerning the relative safety of the loan program without any basis
whatsoever. See Compl. ¶¶ 125–126. Second, unlike Howard, the Complaint in this case alleges
that the NAHB was not merely referring its members to a program in which it had no personal
stake. Indeed, the Complaint alleges that the NAHB and North Star entered into an agreement
involving the promotion of the North Star program to NAHB members and prospective members
and for which the NAHB would receive a share of the application fees. See Compl. ¶¶ 13, 19.
The program was then purportedly touted as an “NAHB program,” which required NAHB
membership to participate, see Compl. ¶¶ 17–18, and it is alleged that the “NAHB permitted
North Star to indicate on its website that the North Star program was being conducted in
conjunction with and under the auspices of the NAHB.” Compl. ¶ 20. Thus, as in Stein, the
Plaintiffs were entitled to rely on the NAHB’s statements as implicit representations that the
NAHB had some factual basis for its stated opinions because they involved or apparently
involved NAHB’s “own business or property as to which [it] is bound and must be presumed to
know the truth.” Howard, 432 A.2d at 707 (quoting Darnell v. Darnell, 200 F.2d 747, 749
(1952)); see also Stein, 182 F.2d at 699 (“Where a party innocently misrepresents a material fact
18
. . . without reasonable grounds for believing it to be true[] such representation will support an
action for fraud.”) (citations omitted); Restatement (Second) of Torts § 539(1) (1977) (“A
statement of opinion as to facts not disclosed and not otherwise known to the recipient may, if it
is reasonable to do so, be interpreted by him as an implied statement . . . that he knows facts
sufficient to justify him in forming it.”).
The NAHB also argues, however, that claims premised on these statements must fail
because such “broad descriptions of alleged misrepresentations” are “insufficient as a matter of
law” under Rule 9(b) of the Federal Rules of Civil Procedure. Def.’s Reply at 4; see also Def.’s
Mem. at 15. The NAHB apparently faults Plaintiffs for failing to quote the precise language of
the NAHB’s alleged assurances. See Def.’s Reply at 5. Although Rule 9(b) does require the
Plaintiffs to state the “time, place, and content” of the misstatement, Plaintiffs are not necessarily
required to plead with the exactitude that the NAHB suggests. “[T]he requirement of
particularity does not abrogate Rule 8, and it should be harmonized with the general directives in
subdivisions (a) and (e) of Rule 8 that the pleadings should contain a ‘short and plain statement
of the claim or defense’ and that each averment should be ‘simple concise and direct.’” United
States ex rel. Joseph v. Cannon, 642 F.2d 1373, 1386 (D.C. Cir. 1981) (quoting 2A J. Moore,
Federal Practice ¶ 9.03, at 9–28 (2d ed.1980)). The Complaint in this case suggests that the
Plaintiffs received multiple assurances concerning the North Star program from various
individuals, some of which were made orally, over a period of time. Plaintiffs that relied on these
assurances have plead the period over which the representations took place (alleging when
discussions with the NAHB began and when the Plaintiffs applied for the program), the method
through which they occurred (by phone or by email), specifically identified the various
individuals who allegedly made each of the representations, and specified that the nature of the
19
assurances concerned the “soundness,” “integrity[,] and safety of the North Star program.” See
Compl. ¶¶ 49–50, 59–60, 84–85, 103–106, 116. This is sufficient to meet Plaintiffs’ burden
under Rules 8 and 9 of the Federal Rules of Civil Procedure.12 See Daisley v. Riggs Bank, N.A.,
372 F. Supp. 2d 61, 79 (D.D.C. 2005) (When a “complaint includes the subject matter of the
alleged misrepresentation, identifies which defendant allegedly made the misrepresentation, and
attributes the misrepresentation to a particular period of time,” plaintiff has pled “sufficient
information, as contemplated by Rule 9(b), to give defendants ‘adequate notice of the specifics’
of [Plaintiff]’s fraud claim.”); United States ex rel. Folliard v. CDW Tech. Servs., Inc., 722 F.
Supp. 2d 20, 31–32 (D.D.C. 2010) (alleging fraud over a period of time is permissible when the
“time span of the scheme is not open-ended, and it give[s] the [defendant] sufficient information
to allow for preparation of a response.”) (internal quotes and citations omitted); McWilliams
Ballard, Inc. v. Broadway Mgmt. Co., 636 F. Supp. 2d 1, 6 (D.D.C. 2009) (“[P]laintiff’s
allegations that misrepresentations were made over the telephone or via e-mail are sufficient to
meet the ‘place’ element.”). Although more specificity might be preferable, the Court finds that
this level of pleading provides the NAHB with “sufficient information to respond to [Plaintiffs’]
12
For similar reasons, the Court finds that the NAHB’s argument concerning the
sufficiency of Concord’s pleading is also without merit. While the NAHB concedes that
Concord “alleges that it was told by [Mr.] Vetter that NAHB had vetted the North Star program,”
the NAHB argues that Concord does not “provide specific information as to when this
representation allegedly occurred.” Pls.’ Mem at 18–19. The Complaint, however, belies that
claim. It states that Concord had “contact with [Mr.] Vetter from April to June 2014” and that,
during these contacts, Mr. Vetter “assured [Concord] of the integrity and safety of the North Star
program.” Compl. ¶¶ 113, 116. Because Concord alleges multiple misrepresentations over a
period of time that is not open-ended, with sufficient information to allow for preparation of a
response, the Court finds that Concord has satisfied its pleading obligation under Rule 9(b). See
U.S. ex rel. Folliard v. CDW Tech. Servs., Inc., 722 F. Supp. 2d 20, 31–32 (D.D.C. 2010).
20
claims.”13 Firestone v. Firestone, 76 F.3d 1205, 1211 (D.C. Cir. 1996); see also U.S. ex rel.
Pogue v. Diabetes Treatment Ctrs. of Am., Inc., 238 F. Supp. 2d 258, 267 (D.D.C. 2002) (“the
main purpose of Rule 9(b) is to ensure that defendants have notice of the charges against them
adequate to prepare a defense.”).
The Court does agree with the NAHB, however, that some of the Plaintiffs have failed to
adequately plead false representations. To start, unlike many of the other Plaintiffs, Plaintiffs
Boomer and Dostal do not allege that they relied upon any specific misstatements made by the
NAHB before applying to the North Star program.14 Rather, they allege that they relied upon the
“manner and timing of the announcement of the North Star Program” at the NAHB’s 2014 Home
Builders Show, which caused them to “reasonably believe[] that the NAHB had diligently
investigated the North Star program prior to allowing it to be offered at the Show.” See Compl.
¶¶ 34, 98. But an announcement of the North Star program alone is not tantamount to an
affirmative representation of anything that the Plaintiffs may reasonably rely upon. Indeed, the
Court finds that, without more, the announcement amounted to little more than a referral, which,
as explained by the District of Columbia Court of Appeals, is not a guarantee as to the quality of
the referred party. See Howard, 432 A.2d at 707. Because Boomer and Dostal do not allege that
the NAHB, at the conference, made any misstatements concerning its due diligence of North Star
or that it made any other material representations for which NAHB lacked the requisite basis,
13
However, as discussed infra, because some of these alleged representations were made
after some of the Plaintiffs applied for the program, the Court finds that those representations
may not form the basis of a misrepresentation claim.
14
Plaintiffs Boomer and Dostal do allege that the NAHB made statements after they
applied to the North Star program, but as described infra, they could not have relied on those
statements and therefore they cannot form the basis for their misrepresentation claims.
21
Plaintiffs Boomer and Dostal have failed to adequately plead their misrepresentation claims.
Accordingly, their claims of fraudulent misrepresentation must be dismissed.
The allegations for Plaintiffs Davis and Bloomfield are similarly deficient. They allege
that they would not have applied for a loan from the North Star program in the absence of the
“assurances,” “assistance,” and “support” provided by NAHB, but they offer no details about any
alleged NAHB misrepresentations.15 Compl.¶ ¶ 75, 94. Indeed, they do not allege any time or
place of a misrepresentation nor do they even attempt to describe the nature of the “assurances,”
“assistance,” and “support.” Such allegations do not suffice for purposes of pleading fraud under
Rule 9(b). See e.g., Carter v. Bank of Am., N.A., 888 F. Supp. 2d 1, 14 (D.D.C. 2012) (“plaintiff
has not stated with any particularity the circumstances constituting fraud, as required by Rule
9(b), because she has not provided even approximate dates of when fraudulent statements were
made to her nor the specific nature of the assurances.”). Therefore, Plaintiffs Davis and
15
Bloomfield’s and Davis’s other allegations of representations do not save their claims.
Although Bloomfield alleges that it received certain “information” about North Star, including
information that NAHB had “done due diligence on the program,” Bloomfield does not allege
who provided the information, where it originated, or when it was provided. Compl. ¶ 90.
Indeed, the Complaint raises a significant question about NAHB’s involvement in those
representations at all because, as Bloomfield alleges, it originally learned about the North Star
program—not from the NAHB—but from Plaintiff Biltmore. Compl. ¶¶ 89, 95. Similarly,
Davis alleges that it first learned of the North Star program from an article in Builder Magazine,
but does not provide any other information about the article or even identify any purported
misrepresentations that it contains. Compl. ¶ 69. Thus, neither the allegations about the
“information” Bloomfield received nor the article that Davis reviewed can satisfy Rule 9(b)’s
heightened pleading necessary to support a claim for fraudulent misrepresentation. See United
States ex rel. Keaveney v. SRA Int'l, Inc., No. 13-855, 2016 WL 6988787, at *11 (D.D.C. Nov.
29, 2016) (claims failed under Rule 9(b) when “[r]elators [did] not allege when the purported
misrepresentations were made, who made the misrepresentation, and whether [defendants] were
involved.”). Furthermore, while Davis alleges that it engaged in telephone or email
communications with Mr. Vetter in early 2014, it does not allege any representations that Mr.
Vetter made pertaining to North Star, let alone a false representation of material fact. See
Compl. ¶¶ 70–73.
22
Bloomfield have failed to state claims for fraudulent misrepresentation for which relief can be
granted.
Finally, to the extent that the Plaintiffs also allege fraudulent misrepresentation as a result
of a material omission, that claim too must fail. “[M]ere silence does not constitute fraud unless
there is a duty to speak.” Saucier v. Countrywide Home Loans, 64 A.3d 428, 439 (D.C. 2013)
(quoting Kapiloff v. Abington Plaza Corp., 59 A.2d 516, 517 (D.C.1948)). Plaintiffs allege that
the NAHB owed them fiduciary duties by virtue of their membership in the NAHB organization.
See Pls.’ Opp’n at 19–20. However, as discussed infra, there is no basis for the existence of such
a fiduciary relationship under the law. Thus, because the Plaintiffs have not identified any duty
owed to them by the NAHB, there can be no liability for the NAHB’s failure to speak.
2. Intent to Deceive
The NAHB also argues that the Plaintiffs claims should be dismissed because they have
failed to allege that the NAHB had the requisite intent to deceive. See Def.’s Mem. at 19–20.
The NAHB argues that Plaintiffs’ claims fail to allege fraudulent intent because they do not
allege that the NAHB was aware of North Star’s fraudulent scheme. Def.’s Mem. at 19–20. But,
as Plaintiffs point out, knowledge of North Star’s fraudulent scheme is not necessary for the
Plaintiffs to plead intent. Pls.’ Opp’n at 19. Indeed, intent to deceive can be inferred “from the
fact that [a] defendant made an affirmative statement that he knew to be false.” Djourabchi v.
Self, 571 F. Supp. 2d 41, 50 (D.D.C. 2008) (citing Nader v. Allegheny Airlines, Inc., 512 F.2d
527, 547 (D.C. Cir. 1975)). And although Rule 9(b) of the Federal Rules requires heightened
pleading when alleging “fraud or mistake,” “[m]alice, intent, knowledge and other conditions of
a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).
23
Here, the Complaint adequately alleges that the NAHB intended to deceive the Plaintiffs
when it assured them that the North Star program was safe, knowing it had no basis for that
claim. The Plaintiffs fairly allege that the NAHB’s assurances concerning the loan program
suggested “that the NAHB had reviewed and approved of the North Star program when in fact it
had conducted no such review” and that the NAHB allegedly “knew or should have known that it
had not conducted [such an] examination.” Compl. ¶¶ 125–126. Plaintiffs allege further that the
NAHB made these representations because it sought to induce its members to apply for North
Star loans “to receive remuneration through increased membership dues and payments though an
affinity program.” See Compl. ¶¶ 18–19, 124. Because Plaintiffs allege that the NAHB was
aware that it had no basis for the claims that it represented, there are sufficient grounds to infer
the NAHB’s intent to deceive. See Djourabchi v. Self, 571 F. Supp. 2d 41, 50–51 (D.D.C. 2008)
(defendant’s statement “that he was a licensed home improvement contractor in the District of
Columbia; a statement he knew to be false” was sufficient to “imply the defendant’s intent to
deceive the plaintiffs.”); Stein, 182 F.2d at 699 (“Where a party innocently misrepresents a
material fact . . . without reasonable grounds for believing it to be true[] such representation will
support an action for fraud.”).
3. Reliance
In addition to their other arguments, the NAHB argues that Plaintiffs Biltmore, Boomer,
and Dostal have not sufficiently alleged reliance because the purported misrepresentations that
they relied upon occurred after they applied for the loan program. Def.’s Mem. at 17–18. The
Court agrees. A plaintiff cannot premise a claim of fraudulent misrepresentation on statements
that were made after his or her alleged reliance. See Sundberg v. TTR Realty, LLC, 109 A.3d
1123, 1128, 1131–33 (D.C. 2015) (agreeing with trial court that plaintiffs “failed to show
24
detrimental reliance because the alleged misrepresentations and omissions occurred after the
contract [for the purchase of land] was signed”); accord Baker v. Gurfein, 744 F. Supp. 2d 311,
318–19 (D.D.C. 2010) (“the purported misrepresentation was made ‘several days after the
conversion of the’ jewelry and thus, Baker did not lose her proprietary interest in the jewelry ‘as
a consequence’ of the misrepresentation.”) (internal citations omitted). In this case, Plaintiff
Biltmore does not specifically allege that NAHB made any representation about the loan
program prior to applying for the program and submitting payment. See Compl. ¶¶ 79–83.
Biltmore alleges, however, that the NAHB eventually assured it of the “integrity and safety of
the North Star program,” but that it did so in “the months following the application.” Compl. ¶¶
84–85 (emphasis added). Similarly, and as discussed above, Plaintiffs Boomer and Dostal allege
that they both applied to the North Star program after attending NAHB’s 2014 Home Building
Show, but neither alleges any misstatements that they relied upon when they did so. Although
they also allege that the NAHB told them that it was “well informed about the North Star
program and that the program was safe,” these representations were made nearly a year after
Boomer and Dostal applied. See Compl. ¶¶ 22, 103. Because the NAHB’s purported statements
occurred after Plaintiffs Biltmore, Boomer, and Dostal applied for the North Star program, they
have failed to plead any actions that they took in detrimental reliance upon the NAHB’s
representations.16 See Sundberg v. TTR Realty, LLC, 109 A.3d 1123, 1128, 1131–33 (D.C.
2015). Accordingly, their claims for fraudulent misrepresentation must be dismissed.
16
While Dostal does allege that these statements were made “prior to the time Dostal
paid additional money for North Star loans,” it does not allege that it relied on those statements
in paying the additional money nor does it specify the amount of money it paid. Compl. ¶ 103.
The Court cannot reasonably infer reliance when Dostal had previously submitted multiple
applications and paid tens of thousands of dollars in the absence of those assurances. Therefore,
the allegations still fail under Rule 9(b).
25
4. Proximate Causation
Finally, the NAHB urges the Court to dismiss the Plaintiffs’ fraudulent misrepresentation
claims because the Complaint fails to allege proximate causation. Def.’s Mem. at 24–25. Under
D.C. law, a plaintiff seeking recovery for fraudulent misrepresentation must prove “that the
defendant’s challenged conduct proximately caused [the] plaintiff’s injury.” Steele v. Isikoff, 130
F. Supp. 2d 23, 34 (D.D.C. 2000) (citing Thompson v. Shoe World, Inc., 569 A.2d 187, 189
(D.C. 1990)). A defendant’s challenged conduct is the proximate cause of a plaintiff’s injury
“only if ‘the injury is the natural and probable consequence of the negligence or wrongful act and
ought to [have been] foreseen in light of the circumstances.’” Steele, 130 F. Supp. 2d at 34
(quoting Sanders v. Wright, 642 A.2d 847, 849 (D.C. 1994)).
The NAHB argues that the fraudulent misrepresentation claims should be dismissed for
all Plaintiffs because their alleged harm was caused by North Star’s criminal scheme, which
NAHB is not alleged to have known about and could not have been foreseeable to the NAHB.
Def.’s Mem. at 24–25. The Court is not persuaded. The fact that the NAHB is not alleged to
have known about the fraudulent scheme is beside the point; Plaintiffs’ claim is that the NAHB
should not have suggested that the North Star program was reputable or safe when the NAHB
had no basis for those representations. The harm that Plaintiffs allegedly suffered was both a
natural and foreseeable consequence of those actions. Indeed, it was foreseeable that the
Plaintiffs might rely on representations giving them comfort in this new, but attractive loan
program, particularly when “conventional financing at reasonable rates was generally not
available for home building projects costing up to $10 million.” Compl. ¶¶ 121–122.
Furthermore, the NAHB should have recognized the risk that members who might rely on those
assurances could be harmed because it is reasonably foreseeable that un-vetted companies may
26
be unqualified or unscrupulous. See e.g., Ret. Program for Emps. of the Town of Fairfield v.
NEPC, LLC, 642 F. Supp. 2d 92, 96 (D. Conn. 2009) (proximate causation adequately alleged
when plaintiffs claimed that if “KPMG had acted in accordance with its duty as an auditor . . . it
would have uncovered Madoff’s fraud and prevented the future financial losses by the Plans”
and that plaintiffs “suffered financial damages as a result.”). Thus, the Plaintiffs have
sufficiently alleged proximate causation.
* * *
Because Plaintiffs Boomer, Davis, Bloomfield, Biltmore, and Dostal have failed to
adequately allege their claims of fraudulent misrepresentation in accordance with Rule 9(b)’s
particularity requirement, the Court dismisses their claims without prejudice, and grants them
leave to amend their Complaint to cure deficiencies. See Firestone v. Firestone, 76, F.3d 1205,
1209 (D.C. Cir. 1996) (“Failure to plead fraud with particularity . . . does not support a dismissal
with prejudice. To the contrary, leave to amend is ‘almost always’ allowed to cure deficiencies
in pleading fraud.”).
D. Negligent Misrepresentation (Count II)
In addition to their fraudulent misrepresentation claims, Plaintiffs also allege negligent
misrepresentation claims against the NAHB. Compl. at 22. To state a claim for negligent
misrepresentation under D.C. law, a plaintiff must allege “(1) that [the defendant] made a false
statement or omitted a fact that he had a duty to disclose; (2) that it involved a material issue; and
(3) that [the plaintiff] reasonably relied upon the false statement or omission to his detriment.”
Kumar v. D.C. Water & Sewer Auth., 25 A.3d 9, 15 n.9 (D.C. 2011) (quoting Redmond v. State
Farm Ins. Co., 728 A.2d 1202, 1207 (D.C. 1999)). Thus, “the elements of a negligent
misrepresentation claim are the same as those of a fraudulent misrepresentation claim, except a
27
negligent misrepresentation claim does not include the state of mind requirements of fraud.”
Regan v. Spicer HB, LLC, 134 F. Supp. 3d 21, 38 (D.D.C. 2015). Furthermore, “like claims for
fraudulent misrepresentation, Rule 9(b)’s particularity requirements apply to claims for negligent
misrepresentation.” Jacobson v. Hofgard, 168 F. Supp. 3d 187, 206 (D.D.C. 2016) (citing
Jefferson v. Collins, 905 F. Supp. 2d 269, 286 (D.D.C. 2012)).
In this case, Plaintiffs’ claims of negligent misrepresentation rest on the same statements
and omissions as their fraudulent misrepresentation claims. See Pls.’ Opp’n at 18. Because of
the parallel nature of the claims, Plaintiffs’ negligent misrepresentation claims survive to the
same extent—and for the same reasons—as their fraudulent misrepresentation claims. Thus, the
Court dismisses the negligent misrepresentation claims as to Plaintiffs Boomer, Davis,
Bloomfield, Biltmore, and Dostal without prejudice.
E. Breach of Fiduciary Duty (Count III)
Finally, Plaintiffs assert a claim against the NAHB for breach of fiduciary duties. Compl.
at 22–23. To state a claim for breach of fiduciary duty under Nevada law, a plaintiff must allege
facts sufficient to show “(1) the existence of a fiduciary duty; (2) breach of that duty; and (3) the
breach proximately caused the damages.” Klein v. Freedom Strategic Partners, LLC, 595 F.
Supp. 2d 1152, 1162 (D. Nev. 2009). Plaintiffs allege that the NAHB owed them fiduciary
duties as members of NAHB and that NAHB breached those duties, injuring Plaintiffs, when it
“assured [loan] applicants that North Star was financially sound and could be trusted when it had
done nothing to confirm such accolades.” Pls.’ Opp’n at 20. The NAHB argues, however, that
Plaintiffs’ claim for breach of fiduciary duty must be dismissed because Plaintiffs have failed to
allege facts demonstrating any fiduciary relationship between NAHB and Plaintiffs. See Def.’s
Mem. at 20–23. For the foregoing reasons, the Court finds that there was no fiduciary
28
relationship between the parties and, accordingly, dismisses Plaintiffs’ breach of fiduciary duty
claims.
“[A] ‘fiduciary relation exists between two persons when one of them is under a duty to
act for or to give advice for the benefit of another upon matters within the scope of the relation.’”
Stalk v. Mushkin, 199 P.3d 838, 843 (Nev. 2009) (quoting Restatement (Second) of Torts § 874
cmt. a (1979)). “The essence of a fiduciary or confidential relationship is that the parties do not
deal on equal terms, since the person in whom trust and confidence is reposed and who accepts
that trust and confidence is in a superior position to exert unique influence over the dependent
party.” Hoopes v. Hammargren, 725 P.2d 238, 242 (Nev. 1986).
The Nevada Supreme Court has held that certain relationships give rise to fiduciary
duties as a matter of law. See, e.g., Powers v. United Servs. Auto. Ass’n, 979 P.2d 1286, 1288
(Nev. 1999) (insurers and insured); Cook v. Cook, 912 P.2d 264, 266 (Nev. 1996) (attorney and
client); id. (spouses); Fick v. Fick, 851 P.2d 445, 449–50 (Nev. 1993) (fiancés); Leavitt v.
Leisure Sports Inc., 734 P.2d 1221, 1224 (Nev. 1987) (corporate officers or directors and
corporation). Beyond these categories, Nevada law recognizes duties owed in “confidential
relationships,” where “one party gains the confidence of the other and purports to act or advise
with the other’s interests in mind.” Perry v. Jordan, 900 P.2d 335, 338 (Nev. 1995) (per curiam)
(internal quotation marks and citation omitted). A confidential relationship “may arise by reason
of kinship or professional, business, or social relationships between the parties.” Id. at 337.
“When a confidential relationship exists, the person in whom the special trust is placed owes a
duty to the other party similar to the duty of a fiduciary, requiring the person to act in good faith
and with due regard to the interests of the other party.” Id. To prove the existence of a
confidential relationship, a party must show that (1) “the conditions would cause a reasonable
29
person to impart special confidence” and (2) the trusted party reasonably should have known of
that confidence. Mackintosh v. Cal. Fed. Sav. & Loan Ass’n, 935 P.2d 1154, 1160 (Nev. 1997)
(per curiam).
Here, the Court need only consider the existence of a categorical fiduciary relationship
because Plaintiffs do nothing to allege circumstances that might give rise to an otherwise
confidential relationship. Plaintiffs do not allege that the NAHB ever made them promises, that
the NAHB ever had—or that Plaintiffs ever sought—any special expertise that Plaintiffs lacked,
that the NAHB ever held property in trust for their benefit, nor do they allege any other facts
from which to infer that the Plaintiffs “imparted special confidence” into the NAHB or that the
NAHB “should have known of that confidence.”17 Indeed, Plaintiffs’ sole allegation concerning
their relationship with the NAHB is their claim that the NAHB is a nonprofit, trade association
that provides its members, including Plaintiffs, with various products and services in exchange
for a membership fee. Thus, the only question for this Court is whether a fiduciary relationship
could have arisen between the NAHB and Plaintiffs simply by virtue of the Plaintiffs’
membership in the organization. However, this is a question that the Supreme Court of Nevada
has never squarely addressed. Thus, this Court must choose the rule that it believes the Supreme
Court of Nevada is “likely to adopt in the future.” Hull v. Eaton Corp., 825 F.2d 448, 453 (D.C.
Cir. 1987) (citing 19 C. Wright, A. Miller & Cooper, Federal Practice and Procedure § 4507,
17
Although Plaintiffs have attempted to allege new facts in their opposition
memorandum suggesting why members may have relied on assurances from NAHB, see Pls.’
Opp’n at 17–18, a court reviewing a motion to dismiss, “need not accept additional allegations
inserted in a document, such as an opposition memorandum, that is not a complaint or
amendment to the complaint.” Sheller-Paire v. Gray, 888 F. Supp. 2d 34, 39 n.3 (D.D.C. 2012)
(citation omitted). Accordingly, this Court will consider only those allegations that appear in the
Complaint.
30
103 (1982)); see also Boley v. Atl. Monthly Grp., 950 F. Supp. 2d 249, 255 (D.D.C. 2013)
(“Where, as here, ‘the substantive law of the forum state is uncertain or ambiguous, the job of the
federal courts is carefully to predict how the highest court of the forum state would resolve the
uncertainty or ambiguity.’”) (quoting Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119
(2d Cir. 1994)).
Plaintiffs argue that “officers and directors of a corporation owe a fiduciary duty to the
corporation and its shareholders” and that this principle “applies to membership organizations as
well.” Pls.’ Opp’n at 19–20. The problem with Plaintiffs’ argument, however, is that they are
bringing claims against NAHB—not NAHB’s officers or directors. While it is certainly true and
uncontroversial that officers and directors owe fiduciary duties to their respective organizations
and to their members or shareholders, see e.g., Shoen v. SAC Holding Corp., 122 Nev. 621, 632,
137 P.3d 1171, 1178 (2006); Leavitt v. Leisure Sports Inc., 734 P.2d 1221, 1224 (Nev. 1987), it
is widely understood that the organizations themselves do not owe such duties, see e.g. Radol v.
Thomas, 772 F.2d 244, 258 (6th Cir. 1985) (“There is not, and could not conceptually be any
authority that a corporation as an entity has a fiduciary duty to its shareholders.”). Indeed,
numerous courts from across the country have rejected that proposition. See e.g., id.; Burcham v.
Unison Bancorp, Inc., 77 P.3d 130, 146 (Kan. 2003) (rejecting argument that “a corporation
owes a fiduciary duty to its stockholders”); Arnold v. Soc’y for Sav. Bancorp, Inc., 678 A.2d 533,
539 (Del. 1996) (same); ULQ, LLC v. Meder, 666 S.E.2d 713, 718 (Ga. Ct. App. 2008) (“[A]
limited liability company owes no fiduciary duty to its members, either directly or vicariously.”);
Ballard v. 1400 Willow Council of Co-Owners, Inc., 430 S.W.3d 229, 241 (Ky. 2013) (“[W]e
cannot say that the [nonprofit corporation] has a fiduciary duty to the individual owners . . . .
Rather, we believe it is the officers and directors that have a fiduciary duty, and that duty is to
31
the nonprofit corporation.”); Oakland Raiders v. Nat’l Football League, 32 Cal. Rptr. 3d 266,
278 (2005) (rejecting argument that “unincorporated association and/or its leaders stand in a
fiduciary relationship with respect to its members under all circumstances.”); Hussey v.
Operating Engineers Local Union No. 3, 42 Cal. Rptr. 2d 389, 394 (1995) (rejecting argument
that “union owes a fiduciary duty to its members”). The Plaintiffs have not identified a single
authority anywhere in the country suggesting that nonprofit trade associations, as opposed to
their officers or directors, owe fiduciary duties to their members.18 The Plaintiffs have also not
advanced any argument as to why such a relationship might exist.
Upon consideration of the relationship at issue and the current state of the law in Nevada,
the Court discerns no persuasive reason why nonprofit trade associations should be categorically
held to occupy positions of special trust with respect to their members. Indeed, the Court has
identified no authority in Nevada that contemplates the existence of such a relationship nor any
authority or line of reasoning indicating that Nevada law is likely to recognize this relationship in
the future. Therefore, the Court is unable to find that the Supreme Court of Nevada is likely to
recognize a fiduciary duty owed by nonprofit trade associations to their members. The Court
also finds that acknowledgement of a fiduciary relationship between nonprofit trade associations
and its members would be particularly inappropriate here because it would “represent a
significant change to the existing matrix of duties” governing the internal affairs of Nevada
nonprofit trade associations, see Arnold, 678 A.2d at 539, and would “expand state law in ways
not foreshadowed by state precedent,” Philadelphia v. Beretta U.S.A. Corp., 277 F.3d 415, 421
18
The only case cited by Plaintiffs in support of their argument, Wisconsin Avenue
Associates, Inc. v. 2720 Wisconsin Avenue Cooperative Association, 441 A.2d 956 (D.C. 1982),
is inapposite. Indeed, that case involved the fiduciary duties owed by developers and directors of
a cooperative housing association, i.e. agents of the cooperative, to the cooperative and its
members—not the duties owed by the organization to its members. Id. at 963.
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(3d Cir. 2002). See also Torres v. Goodyear Tire & Rubber Co., 867 F.2d 1234, 1238 (9th Cir.
1989) (Federal courts sitting in diversity should “hesitate prematurely to extend the law . . . in the
absence of an indication from the [state] courts or the [state] legislature that such an extension
would be desirable.”); Combs v. Int’l Ins. Co., 354 F.3d 568, 577–78 (6th Cir. 2004) (“Federal
courts sitting in a diversity case are in a particularly poor position . . . to endorse [a] fundamental
policy innovation. . . . Absent some authoritative signal from the legislature or the courts of [the
state], we see no basis for even considering the pros and cons of innovative theories”) (internal
quotes omitted). Because the Court finds that the Plaintiffs have failed to allege the existence of
a fiduciary relationship with the NAHB, Plaintiffs’ breach of fiduciary duty claims must be
dismissed.19
IV. CONCLUSION
For the foregoing reasons, Defendant’s Motion to Dismiss is GRANTED IN PART
AND DENIED IN PART. An order consistent with this Memorandum Opinion is separately
and contemporaneously issued.
Dated: June 16, 2017 RUDOLPH CONTRERAS
United States District Judge
19
Even if the Court did recognize a fiduciary duty owed by nonprofit trade associations
to its members, the claims asserted by Sierra’s Glen and Skywatch would still fail because, not
only do they not allege any confidential relationship, they do not allege that they were ever
members of the NAHB. See Compl. ¶¶ 42–67.
33