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Elworthy v. First Tennessee Bank

Supreme Court of Wyoming

March 17, 2017

BRUCE R. ELWORTHY and ANNE B. MARSHALL, Appellants (Plaintiffs),

         Appeal from the District Court of Sheridan County The Honorable John G. Fenn, Judge

          Representing Appellants: Bruce R. Elworthy and Anne B. Marshall of Elworthy & Marshall, P.C., Sheridan, WY. Argument presented by Mr. Elworthy and Ms. Marshall.

          Representing Appellees: Stephenson D. Emery of Williams, Porter, Day & Neville, P.C., Casper, WY; and Steven A. Ellis of Goodwin Proctor, LLP, Los Angeles, CA for Appellees First Tennessee Bank National Association and First Horizon Loan Corporation; and Rick A. Thompson and Lucas Buckley of Hathaway & Kunz, P.C., Cheyenne, WY for Appellee RBS Citizens Bank. Argument presented by Messer's Emery, Ellis, and Thompson.

          Before BURKE, C.J., and HILL, DAVIS, FOX, and KAUTZ, JJ.

          HILL, JUSTICE.

         [¶1] Bruce Elworthy and Anne Marshall (collectively "Plaintiffs") filed an action against Defendants alleging claims for breach of contract, fraud in the inducement, and violation of a California law governing fraudulent business practices, all claims in relation to Defendants' financing of Plaintiffs' real property located in Wyoming and California. Plaintiffs filed their action in Wyoming and sought monetary and punitive damages, rescission and restitution, and an order declaring all encumbrances recorded against their Sheridan, Wyoming property void and expunged.

         [¶2] The district court granted Defendants' Rule 12 motions to dismiss and for judgment on the pleadings. In so ruling, the court applied Wyoming law and found that Plaintiffs' breach of contract claims were barred by the statute of frauds and that Plaintiffs had failed to plead their fraud and fraud-based claims with the required particularity. We affirm.


         [¶3] Plaintiffs failed to include in their brief a separate statement of issues presented for review, as required by W.R.A.P. 7.01(d).[1] Within their statement of the case, Plaintiffs do, however, state as follows:

Appellants respectfully submit that the findings by the District Court that: (1) the Procedural and Substantive Laws of the State of Wyoming controlled the litigation and (2) that the fraud counts were defective was reversible error and that the subsequent [dismissal] pursuant to Rule 12 of the Wyoming Rules of Civil Procedure that the District Court ordered was based upon an improper analysis of the applicable law[.]

         [¶4] Plaintiffs do not reference the district court's ruling on their breach of contract claim, but in the argument portion of their brief, they contend the court erred in that ruling. Given Plaintiffs' statement above and the arguments they make in their briefing, we summarize the issues on appeal as follows:

A. Did the district court err in ruling that Wyoming law should govern the parties' dispute?
B. Did the district court err in ruling that Plaintiffs' breach of contract claims were barred by the statute of frauds?
C. Did the district court err in ruling that Plaintiffs failed to plead their fraud-based claims with the particularity required by W.R.C.P. 9(b)?
D. Did the district court abuse its discretion in ruling that it would not permit any further amendments to Plaintiffs' complaint?


         A. Events Leading to Wyoming Litigation

         [¶5] Bruce Elworthy and Anne Marshall (collectively "Plaintiffs") are married and are both attorneys. In 1997, Plaintiffs bought a home in Sheridan, Wyoming, and in 2002, they began looking for a home in California, where they hoped to spend winters. In 2005, they found a home they wished to purchase in Monterey, California, priced at around $3, 000, 000.[2] Along with the home purchase, Plaintiffs were also required to purchase the sellers' country club membership for $118, 000.

         [¶6] To purchase the California property, Plaintiffs worked with a mortgage broker by the name of Sherri Wall. Ms. Wall originally recommended a mortgage that required only the California property as collateral, but before Plaintiffs closed on the property, Ms. Wall informed Plaintiffs that she had found a better mortgage deal. This deal, which Ms. Wall referred to as the "best financing deal by far, " required that Plaintiffs take out four mortgages to secure financing on the California property. The mortgages were to be issued by First Horizon Home Loan Corporation, which subsequently merged into First Tennessee Bank National Association ("First Tennessee"), and consisted of: a $1, 000, 000 first mortgage on the Sheridan property; a $150, 000 home equity line of credit (HELOC) on the Sheridan property; a $1, 500, 000 first mortgage on the California property; and a $282, 000 HELOC on the California property. Plaintiffs agreed to this financing arrangement and closed on the California property.

         [¶7] After Plaintiffs moved into the California property, they discovered numerous defects that had not been disclosed by the sellers, including flooding and failing windows and an insect and rodent infestation. Plaintiffs contacted the sellers, their real estate broker, and the contractor that built the home to have the undisclosed defects addressed. When no resolution had been reached by the spring of 2007, Plaintiffs demanded rescission of the sales agreement. After that demand was rejected, Plaintiffs, in November 2007, filed litigation in California against the sellers, the contractor, and the real estate brokers, seeking damages and rescission of the sales agreement on the California property.

         [¶8] In December 2007, shortly after filing the California litigation, Mr. Elworthy was diagnosed with a brain tumor that required surgery. After Plaintiffs were advised this would affect Mr. Elworthy's ability to work for some time, they asked Ms. Wall for the name of someone with the lender who could discuss their situation. Ms. Wall referred Plaintiffs to John Harris, an attorney with First Tennessee in its Irving, Texas office.

         [¶9] Plaintiffs thereafter contacted Mr. Harris and informed him of their situation. Mr. Harris offered a forbearance agreement on the California portion of the loans, by which payments would be deferred on those loans until the conclusion of the California litigation and then rolled into the principal balance. Plaintiffs agreed they would continue to prosecute the law suit and would pay the property taxes, homeowner assessments, insurance, maintenance, utilities and other such expenses on the property. Plaintiffs also agreed they would do as much "fix up" as was required to market the property and would move out over the coming months to enable the property to be marketed. In discussing the matter, Plaintiffs asked Mr. Harris if he wanted some form of written documentation of the forbearance and he stated that no writing was required for the action he was taking. Plaintiffs thereafter stopped making payments on the California property.

         [¶10] Mr. Harris contacted Plaintiffs in the spring of 2008 and informed them that he was leaving First Tennessee but that the oral forbearance agreement would remain in place. Shortly thereafter, however, Plaintiffs learned that a MetLife entity was servicing the loans, and they began receiving late notices from MetLife. Plaintiffs then contacted an attorney with MetLife, who denied the existence of a forbearance agreement and informed Plaintiffs that if they did not bring the mortgages on the California property current, MetLife would issue a notice of default. Plaintiffs were unable to bring the mortgages current, and in June 2008, MetLife issued a notice of default. Foreclosure proceedings on the California property began in 2009.

         [¶11] While the foreclosure was pending, Plaintiffs settled with some of the defendants in the California litigation. In April 2010, Plaintiffs contacted First Tennessee in an effort to delay foreclosure proceedings on the California property and find out what type of payment would be required to stop the foreclosure proceedings. First Tennessee would not consent to a delay and would not allow Plaintiffs to cure the default by making a payment on the mortgage. First Tennessee informed Plaintiffs that the only way they could avoid foreclosure was to immediately pay the primary mortgage and HELOC on the California property. Plaintiffs could not do that, and on April 23, 2010, First Tennessee foreclosed on the property.

         [¶12] The suit against the sellers of the California property went to trial in March 2011. The California court found negligent misrepresentations by the sellers but denied the rescission remedy that Plaintiffs sought on two grounds: 1) the property had already been foreclosed on so it could not be returned to the sellers; and 2) Plaintiffs delayed bringing the litigation for two years and the doctrine of laches therefore barred the remedy of rescission. By a decision issued in November 2013, a California appellate court affirmed, agreeing with the trial court that the remedy of rescission was no longer available because of the foreclosure.

         B. Proceedings in Wyoming District Court

         [¶13] On April 16, 2012, while Plaintiffs' California appeal was still pending, Plaintiffs filed a complaint in district court in Sheridan County. The complaint named First Tennessee and First Horizon Loan Corporation (collectively "First Tennessee") as well as other financial institutions as defendants and asserted three counts: 1) breach of contract relating to the oral forbearance agreement; 2) interference with prospective economic advantage, relating to Plaintiffs' loss of the rescission remedy following the foreclosure on the California property; and 3) declaratory relief, seeking a declaration cancelling all encumbrances on Plaintiffs' Sheridan, Wyoming property.

         [¶14] On September 6, 2012, Plaintiffs filed their first amended complaint, which added two new defendants and two new claims. The new claims were for: 1) misrepresentation related to foreign bank manipulation of the London Interbank Offered Rate ("LIBOR") and First Tennessee's issuance of mortgages, including those on Plaintiffs' California property, pegged to the LIBOR rate; and 2) reformation and restitution related to First Tennessee's use of mortgages tied to the LIBOR rate.

         [¶15] All defendants named in the first amended complaint filed motions to dismiss or for judgment on the pleadings. The district court dismissed all claims against some of the named defendants. The court denied First Tennessee's motion to dismiss except for the claim against it for interference with a prospective economic advantage. The court denied in its entirety the motion for judgment on the pleadings filed by RBS Citizens Bank ("RBS"), the entity that now owns the HELOC on the Sheridan, Wyoming property. With respect to Plaintiffs' misrepresentation claim against First Tennessee, the court ruled:

At the hearing, Plaintiffs admitted that this count does not meet the pleading requirements of W.R.C.P. 9. However, they made an oral motion to amend this count to allege fraud in the inducement by Ms. Wall. Plaintiffs contend that Ms. Wall was acting as the agent for First Tennessee, and that they never would have entered into these mortgages if she had not misrepresented her status as an independent broker. Plaintiffs also alleged that they would not have put the Pioneer Property up as collateral if Ms. Wall had not induced them to do so, and they are seeking to invalidate those mortgages due to Ms. Wall's fraud. Under these facts, Plaintiffs could potentially be entitled to relief. The Court recognizes that Plaintiffs' misrepresentation claim has become a "moving target." W.R.C.P. Rule 15 provides that leave to amend "shall be freely given when justice so requires." Therefore, the Court finds that Plaintiffs shall be granted leave to amend their complaint to correct the deficiencies of their misrepresentation claim. Accordingly, the motion to dismiss this claim should be denied at this time.

         [¶16] On February 27, 2015, Plaintiffs filed their second amended complaint against First Tennessee and RBS. The second amended complaint asserted claims for breach of contract, fraud in the inducement, violation of the California Business and Professions Code, and violation of the Truth in Lending Act ("TILA"), and sought monetary and punitive damages, rescission and restitution in relation to the TILA and fraud claims, and a declaration that all encumbrances on Plaintiffs' Wyoming property are void.[3]

         [¶17] RBS answered the second amended complaint and filed a Rule 12(c) motion for judgment on the pleadings. First Tennessee also filed an answer, which it followed with a combined Rule 12(b)(6) motion to dismiss and 12(c) motion for judgment on the pleadings. On May 20, 2016, the district court issued its Second Order on Motions to Dismiss and for Judgment on the Pleadings. In ruling on the dispositive motions, the court judged the sufficiency of the second amended complaint based solely on facts and allegations contained therein, and it ruled that Wyoming law governed the parties' dispute.

         [¶18] Applying Wyoming law, the district court ruled that Plaintiffs' breach of contract claim was barred by the statute of frauds and that no exception to the statute applied. Turning to Plaintiffs' fraud claims, the court found that Plaintiffs failed to plead the claims with the particularity required by W.R.C.P. 9(b) and thus dismissed those claims. The court likewise dismissed Plaintiffs' fraudulent business practices claim under the California Business and Professions Code for failing to plead that claim with the specificity required for a fraud claim. In ruling on Plaintiffs' claims for restitution and rescission and declaratory relief, the court found the claims derivative of the other defective claims and ruled that those must likewise be dismissed. Finally, the court noted that Plaintiffs had not formally made a motion to amend during the motions hearing but had suggested they might seek to amend the complaint to add new allegations of fraud based on the disavowal of the forbearance agreement. The court then ruled:

In this case, the Plaintiffs have previously been given two opportunities to amend their complaint to cure the deficiencies. They were put on notice of the defects in their First Amended Complaint during the first round of motions, but they did not cure these defects through amendment. Therefore, the Court finds in its discretion that a third amendment should not be allowed.

         [¶19] Plaintiffs filed a timely notice of appeal to this Court.


         [¶20] In dismissing Plaintiffs' complaint, the district court ruled pursuant to W.R.C.P. 12(b)(6), which governs motions to dismiss for failure to state a claim, and W.R.C.P. 12(c), which governs motions for judgment on the pleadings. Our review of a dismissal under either rule is de novo. Swinney v. Jones, 2008 WY 150, ¶ 6, 199 P.3d 512, 515 (Wyo. 2008). Concerning our review of a Rule 12(b)(6) dismissal, we have said:

When reviewing W.R.C.P. 12(b)(6) motions to dismiss, we accept the facts stated in the complaint as true and view them in the light most favorable to the plaintiff. We will sustain such a dismissal when it is certain from the face of the complaint that the plaintiff cannot assert any fact which would entitle him to relief. Sinclair v. City of Gillette, 2012 WY 19, ¶ 8, 270 P.3d 644, 646 (Wyo.2012). Although we view the facts in the light most favorable to the plaintiff, we have also stated that "Liberal construction of pleadings does not excuse omission of that which is material and necessary in order to entitle one to relief." Excel Constr., Inc. v. HKM Eng'g, Inc., 2010 WY 34, ¶ 35, 228 P.3d 40, 49 (Wyo.2010) (citing William F. West Ranch, LLC v. Tyrrell, 2009 WY 62, ¶ 9, 206 P.3d 722, 726 (Wyo.2009)).

Stroth v. North Lincoln County Hosp. Dist., 2014 WY 81, ¶ 6, 327 P.3d 121, 125 ...

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