Non Precedential
Non Precedential
This disposition is not an opinion of the full Court and, pursuant to I.O.P. 5.7,
does not constitute binding precedent.
Joseph Downs, Thomas Dunkel, USMR Fund 2, and Oakmont Note Group LLC
(collectively, Plaintiffs) brought suit against 2012 1 JV Holdings LLC, Peter Andrews,
Gregory Palmer d/b/a Dreambuilders Investments LLC, and Gregory Palmer
(collectively, Defendants) for common law fraud and conspiracy and concert of action
in the commission of fraud. App. 39-46. The District Court dismissed Plaintiffs
complaint under the gist of the action doctrine pursuant to Fed. R. Civ. P. 12(b)(6) and
for failure to join a party under Fed. R. Civ. P. 19. App. 5-29. Plaintiffs urge us to
remand to the District Court for its consideration of Bruno v. Erie Ins. Co., 106 A.3d 48
(Pa. 2014), a Pennsylvania Supreme Court decision addressing the gist of the action
doctrine that was published days before the District Court ruled. For the reasons that
follow, we will affirm.
I1
The parties buy and sell mortgage notes. App. 41. In previous transactions,
Defendants Andrews and Palmer, through their companies Dreambuilders and JF
Holdings, purchased mortgage notes from banks and other institutions, and sold them to
buyers such as Plaintiffs Downs and Dunkel, through Plaintiffs company Oakmont,
App. 41, who could then collect on the notes or resell them for a profit.
In reviewing an order granting a Rule 12(b)(6) motion, we accept all factual
allegations as true, construe the complaint in the light most favorable to the plaintiff, and
determine whether, under any reasonable reading of the complaint, the plaintiff may be
entitled to relief. Phillips v. Cty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008)
(internal quotation marks omitted). We may generally consider only the allegations
contained in the complaint, exhibits attached to the complaint and matters of public
record, along with document[s] integral to or explicitly relied upon in the complaint.
Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014) (citation and quotation marks
omitted).
1
In March 2012, Plaintiffs and Defendants discussed the purchase of a group of 171
mortgage notes (the notes) at a discount, if Plaintiffs provided full payment of
approximately $740,000 in advance of the sale.2 Defendants claimed they needed the
money to complete the purchase, which was part of a much larger block of loans. App.
42. Interested in the opportunity but lacking access to that amount of cash, Downs and
Dunkel entered into a verbal agreement with a third party, Remar Investments LP, to
advance the entire $740,000. App. 42. Remars investment was contingent upon several
terms, including Downs and Dunkel personally guaranteeing the investment and that
Remar be listed as the notes initial purchaser, to eventually be assigned to a newly
created LLC, USMR Fund 2, of which Remar would own 51% and Downs and Dunkel,
through Oakmont, would own 49%. App. 42.
After Remar wired the funds necessary for the purchase, Defendants timely
delivered the first fifty-nine notes.3 App. 43. The remaining 112 notes were slated for
delivery five days later, but did not arrive on time. App. 43-44. According to the
complaint, only $399,000 of the notes have been delivered. App. 44.
Plaintiffs filed suit in the Eastern District of Pennsylvania in Oakmonts name
only. App. 326. Their initial complaint was dismissed without prejudice for lack of
subject matter jurisdiction. Plaintiffs re-filed their suit, making largely the same
Without the discount Defendants offered, the notes would have cost $979,000.
App. 42.
3
Although Plaintiffs concede that the first group of notes was delivered on time,
they allege that 35 of the 59 loans . . . were unenforceable either because the loans
lacked the necessary documentation or some other fundamental deficiency. App. 44.
3
allegations, and adding Downs and Dunkel individually and USMR Fund 2 as plaintiffs,
but omitting Remar. App. 39-46.
Defendants filed a motion to dismiss for, among other things,4 failure to state a
claim and failure to join a party under Rule 19, pursuant to Fed. R. Civ. P. 12(b)(6) and
(7), respectively.5 App. 56-93. The District Court granted Defendants Rule 12(b)(6)
motion because their claims were barred by the gist of the action doctrine.6 App. 25-29.
The District Court found that the heart of Plaintiffs claims was that the [D]efendants
did not deliver the enforceable mortgage notes that the plaintiffs were due under the
Defendants also sought dismissal based upon a lack of personal jurisdiction and
improper venue. The District Court held that it had both subject matter and personal
jurisdiction over the case and parties, and that venue was proper in the Eastern District of
Pennsylvania. App. 11-20. No party appeals these rulings.
5
The District Court held that Remar was a necessary party under Rule
19(a)(1)(B), because: (1) Remar was a party to the initial contract, and (2) it was unclear
the extent to which Remar had assigned its obligations to Plaintiffs. App. 22-24. As a
result, the District Court found that Remars absence would leave an existing party
subject to a substantial risk of incurring . . . multiple . . . inconsistent obligations because
of the interest, Fed. R. Civ. P. 19(a)(1)(B), and for this additional reason, dismissed the
complaint. App. 22. Based on the record before the District Court, there is no indication
that Remar is a citizen of either New York or New Hampshire, the states where
Defendants reside. See App. 12 (Defendants are citizens of New York and New
Hampshire); see also D.C. ECF No. 34-6 (affidavit of Daniel Miller, Remar
principal, stating that Remar Holdings, LLC is a California LLC, which is the
general partner of Remar Investments LP, a Nevada partnership). While we
understand the District Courts frustration with Plaintiffs failure to provide additional
information, it appears that, even if joined, Remars presence would not destroy diversity.
Therefore, we need not address the Rule 19 ruling to satisfy ourselves we have subject
matter jurisdiction. Moreover, because we affirm the District Courts dismissal based on
the gist of the action doctrine, we need not address whether the dismissal under Rule 19
was proper.
6
The District Court discussed the gist of the action doctrine under both
Pennsylvania and New York law. Although Defendants appear to have argued that New
York law applied based on a choice of law provision in their contract with Plaintiffs, no
party argues before us that New York law is controlling.
4
contract and the subsequent . . . assignment. App. 28. As a result, the District Court
concluded that Plaintiffs claims sounded in contract, not tort, requiring dismissal under
the gist of the action doctrine. App. 28-29. The District Court reached this conclusion
without addressing the Pennsylvania Supreme Courts decision in Bruno, published three
days before the District Court issued its opinion in this case. See App. 5; see also
Bruno, 106 A.3d at 48.
Plaintiffs appeal, arguing that the District Courts failure to consider the Bruno
decision necessitates remand for further consideration.
II7
Plaintiffs contend that the District Court failed to adequately analyze the nature
of the duty alleged to have been breached, as required by Bruno. Bruno, 106 A.3d at 68;
See Appellants Br. 18. This argument is unavailing. Although the District Court did
not address Bruno, its analysis was consistent with that opinion.
The gist of the action doctrine provides that a tort claim based on [a] partys
actions undertaken in the course of carrying out a contractual agreement, is barred when
the gist or gravamen of the cause of action . . . although sounding in tort, is, in actuality, a
claim against the party for breach of its contractual obligations. Id. at 53. Thus, to
evaluate whether the gist of the action doctrine applies, a court must identify the duty
breached, because the nature of the duty alleged to have been breached . . . [is] the
critical determinative factor in determining whether the claim is truly one in tort, or for
breach of contract. Id. at 68. In this regard, the substance of the allegations comprising
a claim in a plaintiffs complaint are of paramount importance, and, thus, the mere
labeling by the plaintiff of a claim as being in tort . . . is not controlling. Id. Put simply,
consistent with Bruno and its predecessors,8 to determine whether an action is barred by
the gist of the action doctrine, we must examine the factual allegations and ask, [w]hats
this case really about? Pediatrix Screening, Inc. v. TeleChem Intl, Inc., 602 F.3d 541,
550 (3d Cir. 2010).9
This case is about Defendants alleged failure to fulfill their contractual promises
to deliver all of the purchased notes. Even though Plaintiffs allege that the delivery did
not occur because the outstanding notes were never owned by Defendants and [which
they] fraudulently represented as being owned or controlled, App. 44, and Defendants
do not have the funds fraudulently procured or the notes promised having used the funds
Most notable among these prior cases was eToll, Inc. v. Elias/Savion Advert.,
Inc., 811 A.2d 10, 14 (Pa. Super. Ct. 2002), which applied the gist of the action doctrine
to fraud cases. eToll held that a tort claim is subject to the gist of the action doctrine if it
arises solely from the contract between the parties, where the duties allegedly breached
were based in the contract itself, where liability stems from a contract, or where the
claim is essentially a duplication of a breach of contract claim or the success of a claim is
entirely dependent, and hence inextricably intertwined with the contracts terms. Id. at
19, 21. The Bruno court read eTolls inextricably intertwined language narrowly,
affirming its applicability only insofar as it could be viewed in the context of determining
whether the nature of the duty upon which the breach of contract claims rest is the same
as that which forms the basis of the tort claims. Bruno, 106 A.3d at 68-69, 69 n.17.
9
Plaintiffs present additional material in their brief and appendices, including
emails between the parties and information about a case filed in another district. See
Appellants Br. 33-40. In accordance with Rule 12(b)(6), we limit our analysis to the
facts as alleged in the complaint, its attached exhibits, and documents integral to or
explicitly relied upon in the complaint. See Skolas, 770 F.3d at 249.
6
and notes to perpetuate an on-going Ponzi scheme, App. 45, the obligation to perform
was the result of the contract. See Bruno, 106 A.3d at 69-70 (holding that the claim was
not barred, in part, because it was not founded on the breach of any specific executory
promise contained in the contract). Thus, regardless of Plaintiffs assertions about why
the notes were not delivered, the crux of their action is that Defendants failed to deliver
the notes as required under the contract, and hence, the duty breached is one created by
the parties by the terms of their contract. Id. at 68 (when facts establish that the duty
breached is one created by the parties by the terms of their contract, the claim is to be
viewed as one for breach of contract).
Like the Bruno court, the District Court appropriately focused on the nature of the
duty alleged to be breached, not merely on whether the contractual duties were
sufficiently intertwined with the alleged torts. It explicitly held that [t]he heart of the
plaintiffs fraud claim . . . is that the defendants did not deliver the enforceable mortgage
notes, which violated an obligation created by contract, rather than by the larger
societal policies embodied in the law of torts. App. 28 (quoting Bohler-Uddeholm Am.
Inc. v. Ellwood Grp. Inc., 247 F.3d 79, 104 (3d Cir. 2001)). Because the District Court
examined the gist of the action doctrine consistent with Bruno, and reached the correct
outcome, there is no need for remand.
Plaintiffs cannot rescue their claim by attempting to cast their complaint as one
alleging breach of a different duty, such as fraud in the inducement or misrepresentation
regarding how their money would be used. Pennsylvania state and federal courts have
reached different conclusions about whether the gist of the action doctrine applies to
7
fraudulent inducement claims. Compare Sullivan v. Chartwell Inv. Partners, LP, 873
A.2d 710, 719 (Pa. Super. Ct. 2005) (allowing claim for fraud in the inducement to
proceed where defendant allegedly agreed to perform obligations it had no intention to
perform to induce a change in the contract) with Vives v. Rodriguez, 849 F. Supp. 2d.
507, 518-20 (E.D. Pa. 2012) (collecting cases and holding a fraudulent inducement claim
barred by the gist of the action doctrine); see Wen v. Willis, --- F. Supp. 3d. ---, 2015 WL
4611903, at *5 (E.D. Pa. 2015) ([W]here the precontractual statements that are the basis
for the fraudulent inducement claim concern specific duties that the parties later outlined
in the alleged contract, the claim may be dismissed under the gist of the action doctrine)
(quoting Integrated Waste Solns, Inc. v. Goverdhanam, No. 10-2155, 2010 WL
4910176, at *11 (E.D. Pa. Nov. 30, 2010)). However, we need not decide whether fraud
in the inducement claims are categorically barred under the gist of the action doctrine
because the pleadings demonstrate that this case is about a failure to perform under the
contract. Plaintiffs complaint demonstrates that the primary basis for alleging that
fraudulent activity induced the contract is the fact that the notes were not all delivered in
accordance with the contract, not a failure to fulfill a separate societal duty which may
exist in other cases. Similarly, the allegation that Plaintiffs funds were used for
transactions unrelated to purchasing the notes simply underscores the conclusion that
Plaintiffs claim that the Defendants failed to hold up their end of the bargain. See App.
45-46.
Because the nature of the duty alleged to be violated arises out of Defendants
contractual promises to deliver the notes, and not a broader social duty, see Bruno, 106
8
A.3d at 68, we will affirm the District Courts dismissal of the complaint pursuant to the
gist of the action doctrine.
III
For the foregoing reasons, we will affirm the order of the District Court.
missing an essential party, who may upset complete diversity, I would affirm on that
ground rather than reaching the merits.
As the Majority indicates, the party that actually purchased the notes from the
Defendants was not any of the Plaintiffs in this suit, but rather an unjoined party, Remar
Investments, LP (Remar). In fact, the contract that was supposedly fraudulently
induced does not include any of the Plaintiffs as parties. Rather, it was between Remar
and Defendant JV Holdings, LLC. After receiving the mortgage notes from JV Holdings,
Remar was to assign them to Plaintiff USMR Fund 2, in which Remar would own a
majority share. The Plaintiffs allege that USMR Fund 2 is now completely owned by
Oakmont Note Group, LLC (Oakmont), which is in turn completely owned by Downs
and Dunkel.2 They also claim that Remar has assigned all rights in the mortgage notes to
USMR Fund 2. Based on those facts and averments, the District Court was concerned
that Remar was an indispensable party to this litigation, and I share that concern.
In reviewing the District Courts Rule 12(b)(7) analysis, we employ a generally
deferential standard.
To the extent a district courts Rule 19(a) determination is premised on a
conclusion of law, this courts review is plenary. Findings of fact are
reviewed for clear error. This court reviews for abuse of discretion a
district courts Rule 19(b) determination that a party is indispensable and
that dismissal is required because the partys joinder would destroy subject
matter jurisdiction.
Specifically, the Plaintiffs allege in their Complaint that Oakmont owns 100%
of USMR 2, (App. 40 6), and that Plaintiff Downs owns 50% of Oakmont and 50%
of USMR 2 while Plaintiff Dunkel owns 50% of Oakmont and 50% of USMR 2, (App.
39 5). Read literally, the allegations about the ownership interests in USMR Fund 2
add up to 200%. I infer that the Complaint means to allege that Downs and Dunkel each
own half of Oakmont, which in turn owns all of USMR Fund 2.
2
Huber v. Taylor, 532 F.3d 237, 247 (3d Cir. 2008) (citation omitted).
The District Court properly engaged in the necessary two-step analysis for
evaluating whether a party is indispensible under Rule 19. A court first must determine
whether the absent [parties] should be joined as necessary parties under Rule 19(a). If
they should be joined, but their joinder is not feasible inasmuch as it would defeat
diversity of citizenship ... , [a court] next must determine whether the absent parties are
indispensable under Rule 19(b). Gen. Refractories Co. v. First State Ins. Co., 500 F.3d
306, 312 (3d Cir. 2007).
In this case, the District Court determined that Remar was a necessary party under
Rule 19(a)(1)(B), which makes a party necessary if that person claims an interest
relating to the subject of the action and is so situated that disposing of the action in the
persons absence may ... leave an existing party subject to a substantial risk of incurring
double, multiple, or otherwise inconsistent obligations because of the interest. Fed. R.
Civ. P. 19(a)(1)(B). It is undisputed, as observed by the District Court, that Remar is a
party to the contract underlying the plaintiffs claims. (App. 22.) In evaluating the
Plaintiffs proffered assignment of Remars rights,3 the Court concluded that [i]t is not
clear ... that Remar actually assigned all of its rights and interests in the subject of this
action, as the supposed assignment makes no mention of an assignment of Remars
rights under the contract itself, or of an assignment of any fraud claim that Remar might
have against defendants. (App. 23.) Moreover, the Court determined that Remar
refused to grant the defendants a full release from liability, indicating that Remar may
indeed institute some action against the defendants in the future. (App. 25.)
Accordingly, the District Court found that Remar was a necessary party. In the Courts
words, it could not see how it [could] allow the case to go forward without Remar; the
risk of prejudice to the defendants is too great. (App. 25.)
The Plaintiffs contend that Remar is not a necessary party because it has no
interest in USMR Fund 2, other than its rights under voting trust and commercial
security agreements and as trustee of USMR Fund 2. (Opening Br. at 39.) But the voting
trust agreement cited by the Plaintiffs indicates that Remar remains a trustee of one
hundred percent ... of the ... membership interests in USMR Fund 2 LLC, suggesting
that it may still retain an interest in USMR Fund 2 and the mortgage notes. (App. 261.)
The Plaintiffs also argue that they were personally liable to Remar for the entire
$740,000 under a handshake deal and that they had in fact paid Remar in full. (Opening
Br. at 39.) But they cite no evidence for those assertions, which run headlong into the
District Courts finding that the Plaintiffs did not produce[] any evidence of the alleged
indemnification of Remar nor any evidence that they would indeed be able to
indemnify Remar for any losses Remar suffered. (App. 23.) I therefore see no basis to
upset the District Courts factual findings, which sufficiently support its conclusion that
Remar was a necessary party.
That opens the second part of the Rule 19 analysis, determining whether joinder is
feasible. The Plaintiffs suggest that, if Remar is a necessary party, it could simply be
joined by the Court under Rule 19(a)(2), but they provide no reasoning to support the
claim that joinder would be feasible. The District Court rightly noted that, [d]espite
over two years of litigation ... the plaintiffs have not established the citizenship of
Remar. (App. 24.) The primary evidence before the District Court on the Rule 12(b)(7)
motion was an affidavit from Remars principal averring that Remars general partner
was Remar Holdings, LLC, a California limited liability company. Even if we were to
credit that affidavit, however, it provides just enough information to know that we need
much more to determine Remars citizenship namely the identities of Remars limited
partners and the members of Remar Holdings. See Carden v. Arkoma Assocs., 494 U.S.
185, 195 (1990) (holding that a limited partnerships citizenship depends upon the
citizenship of both its general and limited partners); Zambelli Fireworks Mfg. Co. v.
Wood, 592 F.3d 412, 420 (3d Cir. 2010) ([T]he citizenship of an LLC is determined by
the citizenship of its members.).4 Given the Plaintiffs ongoing intransigence in
declining to provide the information necessary to determine Remars citizenship, the
District Court did not abuse its discretion in determining that joinder was not feasible. 5
[A]s with partnerships, where an LLC has, as one of its members, another LLC,
the citizenship of unincorporated associations must be traced through however many
layers of partners or members there may be to determine the citizenship of the LLC.
Zambelli Fireworks, 592 F.3d at 420 (internal quotation marks omitted).
4
Based on its conclusions that Remar was a necessary party to avoid prejudice to
the Defendants, and that Remars citizenship for diversity purposes was indeterminate,
the District Court acted reasonably within its discretion in ruling that Remar was an
indispensible party that could not be feasibly joined. Dismissal was thus proper under
Rule 12(b)(7).
Accordingly, I would affirm the District Courts dismissal order on Rule 19
grounds rather than reach the merits of the gist of the action dispute. I therefore concur in
the judgment of the Court.
Remars partners and their citizenship. (Oakmont Note Group LLC v. Andrews, No.
2:12-cv-05257-MAM (E.D. Pa.), ECF No. 59). The Plaintiffs substantive response was
an affidavit similar to the one filed in this case, there averring that Remar was
administered by Remar Holdings LLC, a Nevada limited liability company, and owned
in part by an individual residing in California, a California Revocable Family Trust, and a
Nevis limited liability corporation. (Id. at ECF No. 60-6). That did little more than
point out how much more information would be necessary to determine Remars
citizenship namely, the membership of Remar Holdings LLC, the legal domicile of the
California resident, the trustee of the revocable family trust, and the membership of the
Nevis LLC.
6