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Delmar Financial Co. v. Ocwen Loan Servicing, LLC

United States District Court, E.D. Missouri, Eastern Division

May 10, 2019




         This matter is before the Court on Defendant's motion to dismiss counts II-IV of Plaintiff's amended complaint for failure to state a claim pursuant to Rule 12(b)(6). ECF No. 51. For the reasons set forth below, the motion will be granted in part and denied in part.


         Plaintiff Delmar Financial Company (Delmar) is a mortgage lender. Defendant Ocwen Loan Servicing (Ocwen) is a mortgage loan servicer. In January 2014, Delmar and Ocwen entered into a Subservicing Agreement, governed by New York law, pursuant to which Ocwen was to act as Delmar's subservicer, providing loan servicing support such as collecting payments from borrowers and remitting those payments to secondary market investors. The Agreement contains numerous representations and warranties by which Ocwen affirmed its ability to perform its obligations thereunder, i.e., its operational capabilities, its good standing, compliance with applicable laws, and the absence of litigation and other impediments to performance.

         In December 2017, Delmar filed a lawsuit alleging that Ocwen had breached the Agreement by failing to perform in numerous respects.[1] Specifically, Delmar claims that Ocwen failed to initiate timely foreclosures, used an inadequate service platform, violated regulatory rules, and committed a variety of other operational errors that caused Delmar to incur losses. In October 2018, Delmar amended its complaint to add tort claims of fraudulent misrepresentation (count II), fraudulent omission (count III), and negligent misrepresentation (count IV), asserting that Ocwen knew before signing the Agreement that it would be unable to perform due to massive systemic deficiencies and resultant regulatory sanctions.

         As relevant to these additional claims, Delmar's complaint sets forth the following chronology of Ocwen's regulatory problems. In 2011, Ocwen signed an agreement with the New York State Department of Financial Services requiring Ocwen to adhere to applicable industry regulations. After failing to comply, in December 2012, Ocwen signed a consent order imposing two years of compliance monitoring by an independent compliance manager, which began in July 2013. According to Ocwen's Form 10-Q for the quarter ending September 30, 2013, Ocwen was “subject to a number of pending federal and state regulatory investigations.” In December 2013, just days before Ocwen signed the Subservicing Agreement with Delmar, the compliance manager retained in the New York State matter reported that Ocwen's technology systems and personnel were inadequate and ineffective, causing a backlog of over 400, 000 loans. Around the same time, Ocwen was sued by the Consumer Financial Protection Bureau (CFPB) and forty-eight states, including New York and Missouri, citing 17 unfair or deceptive practices in violation of consumer financial protection laws. Ocwen submitted to a consent judgment in that suit on December 16, 2013.

         Delmar pleads that Ocwen was aware of these problems when it negotiated the Agreement and thus knew that it was incapable of performing thereunder, both during negotiations in 2013 and upon execution of the Agreement January 1, 2014, thereby fraudulently inducing Delmar to enter into it. Delmar further pleads that it relied on Ocwen's representations of its ability to perform and was unaware of their falsity.

         Ocwen filed the present 12(b)(6) motion seeking dismissal of counts II-IV on the bases that: (1) Delmar's tort claims are not cognizable because they merely duplicate its breach of contract claim; (2) Delmar's pleadings are not sufficiently specific to satisfy the heightened standards of Rule 9(b); (3) with respect to count III (fraudulent omission), Ocwen had no duty to disclose its circumstances to Delmar before execution of the Agreement; and (4) with respect to count IV (negligent misrepresentation), the parties bargained at arm's length and had no special relationship giving rise to a duty, and Delmar's claim is barred by the doctrine of economic loss.


         Rule 12(b)(6) pleading standard

         The purpose of a motion to dismiss under Rule 12(b)(6) is to test the legal sufficiency of the complaint. Arthur v. Medtronic, Inc., 123 F.Supp.3d 1145, 1148 (E.D. Mo. 2015). To survive a Rule 12(b)(6) 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)). Determining whether a complaint states a plausible claim for relief is a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. Id. at 679. The court accepts the plaintiff's factual allegations as true and draws all reasonable inferences in favor of the nonmoving party. Torti v. Hoag, 868 F.3d 666, 671 (8th Cir. 2017). But “[c]ourts are not bound to accept as true a legal conclusion couched as a factual allegation, and factual allegations must be enough to raise a right to relief above the speculative level.” Id.

         Delmar's tort claims are independent.

         First, Ocwen asserts that Delmar's tort claims must be dismissed because they merely duplicate its breach of contract claim. Under New York law, “parallel fraud and contract claims may be brought if the plaintiff: (1) demonstrates a legal duty separate from the duty to perform under the contract; (2) points to a fraudulent misrepresentation that is collateral or extraneous to the contract; or (3) seeks special damages that are unrecoverable as contract damages.” Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20 (2d Cir. 1996). New York distinguishes between a promissory statement of what will be done in the future, which gives rise only to a breach of contract cause of action, and a misrepresentation of a present fact that gives rise to a separate cause of action for fraudulent inducement. Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 184 (2d Cir. 2007). “A misrepresentation of present facts is collateral to the contract (though it may have induced the plaintiff to sign the contract) and therefore involves a separate breach of duty.” Id. The fact that the alleged misrepresentations also establish a breach of the contractual representations and warranties does not alter the result. Id. “A warranty is not a promise of performance, but a statement of present fact.” Id. A fraud claim should be dismissed as redundant when it merely restates a breach of contract claim, i.e., when the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract.” First Bank of Americas v. Motor Car Funding, Inc., 257 A.D.2d 287, 291 (N.Y.App.Div. 1999). “By contrast, a cause of action for fraud may be maintained where a plaintiff pleads a breach of duty separate from, or in addition to, a breach of the contract.” Id. “For example, if a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the same circumstances also give rise to the plaintiff's breach of contract claim.” Id. at 291-92.

         Applying these principles to Delmar's complaint, the Court concludes that Delmar's tort claims are not redundant to its breach of contract claim. Delmar centrally pleads that, in negotiations leading up to and at the time of execution of the Agreement, Ocwen misrepresented or omitted then-present facts as to its technological and operational capacity to perform the Agreement in order to induce Delmar to enter into it. Though Ocwen asserts that Delmar's claims are redundant because they involve assurances encompassed in the representations and warranties section of the Agreement, “it is of no consequence that some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim.” MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D.3d 287, 294 (N.Y.App.Div. 2011). “It simply cannot be the case that any statement, no matter how false or fraudulent or pivotal, may be absolved of its tortious impact simply by incorporating it verbatim into the language of a contract.” Id. (citing In ...

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