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

United States District Court, District of Columbia

June 16, 2017

BOOMER DEVELOPMENT, LLC, et al., Plaintiffs,
v.
NATIONAL ASSOCIATION OF HOME BUILDERS OF THE UNITED STATES, Defendant. Re Document No. 10

          MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS

          RUDOLPH CONTRERAS United States District Judge.

         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 nonrecourse 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, 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 BACKGROUND[3]

         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 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 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 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 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.” 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 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 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, “[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.”). 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 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 “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. ...


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