United States District Court, N.D. Illinois, Eastern Division.
Isaac REESE and Gennell Reese, Plaintiffs,
v.
HAMMER FINANCIAL CORPORATION; Joseph F. Hammer III; One Stop Mortgage, Inc.;
Aames Funding Corporation, d/b/a Aames Home Loan, Defendants.
No. 99 C 0716.
Nov. 30, 1999.
MEMORANDUM OPINION AND ORDER
MAROVICH, J.
*1 On February 4, 1999, Plaintiffs Isaac and Gennell Reese ("the Reeses") filed a Complaint in this Court against Defendants Hammer Financial Corporation ("Hammer Financial"), Joseph Hammer III ("Joseph Hammer"), One Stop Mortgage, Inc., and Aames Funding Corporation, alleging: (1) violations of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601, et seq. (Count I), (2) violation of the United States Bankruptcy Code (Count II), (3) violation of the Illinois Consumer Fraud Act ("ICFA"), 815 ILCS 505/2 (Count III) and (4) breach of fiduciary duty pursuant to Illinois law (Count IV). Hammer Financial and Joseph Hammer presently move to dismiss the Reeses' Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and strike the Reeses' claim for attorney's fees contained in Count II pursuant to Rule 12(f). For the reasons stated below, the Court denies the motion to dismiss and grants the motion to strike the attorney's fees request contained in Count II.
BACKGROUND
The Reeses, a married couple, filed for Chapter 13 Bankruptcy in 1997. While the bankruptcy was pending, the Reeses' furnace failed, requiring the purchase of a replacement. The Reeses used Hammer Financial to arrange a loan to pay for the furnace. Hammer Financial arranged a $35,000 loan from One Stop, which not only covered the cost of the furnace, but also payed off most, but not all, of the Chapter 13 debt. The Reeses allege that Hammer Financial and Joseph Hammer "failed to disclose ... that the interest rate on the loan was substantially higher than any interest that would be payable pursuant to the Chapter 13 plan." (Compl.¶ 15.)
On November 19, 1998, the Reeses attended a closing, signed a note and mortgage and received, among other documents, a TILA disclosure statement and a notice of right to cancel the loan transaction. The Reeses allege that the notice of right to cancel had the dates left blank and that, as a result, they did not receive effective notice of their right to cancel. Additionally, the Reeses allege that none of the parties sought approval of this loan transaction with the Bankruptcy Court. On December 28, 1998, the Reeses, through their counsel, gave notice of recission of the loan transaction. Defendants have failed and refused to honor the Reeses' recission of the loan.
On February 4, 1999, the Reeses filed their four-count Complaint in this Court, asserting four grounds for recission of the note and mortgage they executed on November 19, 1998. Particularly, the Complaint asserts recission is appropriate because: (1) they received effective notice of the Reeses' right to rescind in violation of TILA (Count I), (2) no party secured approval from the Bankruptcy Court (Count II), (3) Defendants' acts and practices violated the Illinois Consumer Fraud Act (Count III), and (4) Defendants violated their fiduciary duty to the Reeses (Count IV). Hammer Financial and Joseph Hammer presently move to dismiss the Reeses' Complaint and to strike the Reeses' request for attorney's fees under Count II.
MOTION TO DISMISS STANDARDS
*2 In reviewing a motion to dismiss pursuant to 12(b)(6) of the Federal Rules of Civil Procedure, the Court examines the sufficiency of the complaint rather than the merits of the lawsuit. See Triad Assoc. v. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir.1989). "[T]he issue is not whether the plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence that supports the claims." Scheurer v. Rhodes, 416 U.S. 232, 236 (1974). A motion to dismiss will be granted only if the Court finds that the plaintiff can put forth no set facts that would entitled her to relief. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Venture Assoc. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 432 (7th Cir.1993). On a motion to dismiss the Court draws all inferences and resolves all ambiguities in the plaintiff's favor and assumes that all well pleaded facts are true. See Dimmig v. Wahl, 983 F.2d 86, 87 (7th Cir.1993).
DISCUSSION
As noted above, the Reeses' Complaint raises four grounds for rescission of the note and mortgage they executed on November 19, 1998. The motion to dismiss filed by Joseph Hammer and Hammer Financial attacks each of these grounds which comprise separate counts of the Reeses' Complaint. The Court considers the arguments contained in the motion to dismiss in turn.
I. Truth in Lending Claim (Count I)
TILA establishes a right of recission for any loan transaction in which the borrower's principal dwelling is used as security. See 15 U.S.C. § 1635(a). The recission period extends until "midnight of the third business day following consummation [of the loan], delivery of the notice [of the right to rescind], or delivery of all material disclosures, whichever occurs last." 12 C.F.R. § 226.23(a)(3). Under TILA regulations, a creditor is required to "deliver two copies of the notice of the right to rescind to each consumer entitled to rescind." 12 C.F.R. § 226.23(b)(1). The notice "shall be on a separate document that identifies the transaction" and shall "clearly and conspicuously" disclose the consumer's right to rescind the transaction. Id. If the required notice or material disclosures are not delivered, the right to rescind shall expire three years after consummation. See 12 C.F.R. § 226.23(a)(3).
Count I of the Reeses' Complaint contends that the Reeses are entitled to the recission of the loan transaction and refund of broker's fees paid to Hammer Financial because the notice of the right to rescind they received contained a technical violation of the TILA regulations discussed above. In particular, the Reeses allege that the notice of right to rescind they received "had the dates left blank," [FN1] thereby failing to give effective notice. (Compl.¶ 20.)
FN1. The Reeses attached a copy of this unsigned and undated notice of right to cancel to their Complaint. (Compl., Ex. F.)
In the motion to dismiss, Hammer Financial asserts that, contrary to the Reeses' allegations, the notice of right to cancel given to and signed by the Reeses disclosed the date of the transaction as well as the date of recission. In support of this contention, a copy of a "Notice of Right to Cancel" signed by the Reeses which contains the transaction date and the cancellation date has been attached to the motion to dismiss. (See Defs. Mot., Ex. A.) Hammer Financial contends that this document demonstrates that the unsigned and undated notice of right to rescind which the Reeses attached to their Complaint was not the final notice given to them and that, in fact, they received a properly signed and dated notice.
*3 In reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim, the Court is limited to the allegations contained in the pleadings themselves. Nevertheless, documents attached to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to his or her claim. See Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir.1998). "[T]his is a narrow exception aimed at cases interpreting, for example, a contract." Id. Hammer Financial asserts that the recission notice attached to its motion fits into the narrow exception discussed in Levenstein in that the document is central to the Reeses' claim and referred to in their Complaint. (See Def. Mot. at 2 n. 2.)
This Court disagrees that it is appropriate to consider the document attached to the motion to dismiss. Indeed, the Reeses have attached to their Complaint the document "central" to their improper notice claim--namely, an unsigned Notice of Right to Cancel which they allege violates TILA's cancellation notice requirements. Although the signed Notice of Right to Cancel attached to the motion to dismiss may be "central" to Hammer Financial's defense of the Reeses' allegations, it does not meet the narrow exception of documents considered part of the pleadings. Instead, it merely raises questions regarding the factual circumstances surrounding the delivery of the Notice of Right to Cancel to the Reeses--questions which would be inappropriate for this Court to pursue in this motion to dismiss.[FN2]
FN2. Although the Court may, in its discretion, consider materials beyond the pleadings if it converts a Rule 12(b)(6) motion to one for summary judgment, the Court declines to do so in this case and, therefore, has not relied on the recission notice attached to the motion to dismiss.
The Court additionally rejects Hammer Financial's two other arguments attacking the Reeses' TILA claim. First, Hammer Financial contends that the Reeses' TILA claim does not state a cause of action because they have not alleged that they are prepared to or have offered to return the monies given to them by One Stop. Hammer Financial has presented no apposite authority for the proposition that the Reeses must do so, and, indeed, the contention appears to contradict the language of § 1635(b) which provides that "[u]pon the performance of the creditor's obligations [to deliver any property to the obligor upon rescission], the obligor shall tender the property to the creditor [.]" [FN3]
FN3. It additionally bears noting that the letter requesting recission sent to Defendants by the Reeses' counsel clearly indicates that the Reeses were prepared to return funds upon acknowledgment of the recission request. (See Compl., Ex. H.)
Finally, Hammer Financial asserts that the Reeses have failed to state a cause of action for violation of TILA against them because they entered into the loan with One Stop and that Hammer Financial merely engaged in a broker agreement. The Court, however, agrees with the Reeses that their request for recission of the mortgage transaction includes the request to void the broker agreement, i.e ., by exercising their right to rescind, they are not liable for any finance charge, including borrower-paid mortgage broker fees. (See Pls. Resp. at 8.)
In sum, the Court denies the motion to dismiss the Reeses' TILA claim.
II. Failure to Procure Court Approval (Count II)
Pursuant to section 364 of the Bankruptcy Code, which governs post-petition financing agreements, a debtor cannot incur post-petition debt without authorization from the bankruptcy court following notice and a hearing. See 11 U.S.C. § 364. In Count II of their Complaint, the Reeses allege that rescission is proper because no party to the transaction sought court authorization and, consequently, the transaction is unlawful and ineffective. (Compl.¶ ¶ 32-33.)
*4 In the motion to dismiss, Hammer Financial argues that it did not have the duty, as mortgage broker, to secure court approval prior to the execution of the loan transaction. Hammer Financial asserts that § 364 places the requirement of receiving authorization of post-petition credit on the Reeses, not the lender. Moreover, Hammer Financial asserts that it was not a "lender," but the mortgage broker and, as such, cannot be charged with knowledge of any necessity of bankruptcy court approval.
Regardless of whose responsibility it was to notify the bankruptcy court here, it is undisputed that the bankruptcy court did not authorize the transaction, and that such authorization was necessary. As such, the pertinent issue here is the effect of a failure of the parties in post-petition financing agreements to receive the requisite court authorization pursuant to § 364. Hammer Financial has submitted no authority for the proposition that rescission is inappropriate under the present circumstances. There is authority, however, which supports the Reeses' contention that rescission is appropriate. See, e.g., Garofalo's Finer Foods, Inc. v. First Nat'l Bank of Harvey, 186 B.R. 414, 430 (N.D.Ill.1995); In re J.L. Graphics, Inc., 62 B.R. 750, 756 (D.N.H.Bankr.1986); In re Bernheim, 62 B.R. 739, 743 (D.N.J.Bankr.1986). The Court therefore denies the motion to dismiss the Reeses' purported grounds for recission pursuant to 11 U.S.C. § 364.[FN4]
FN4. Hammer Financial moves this Court to strike the Reeses' request for attorney's fees in Count II. The Reeses contend that they are entitled to recovery of attorney's fees pursuant to 11 U.S.C. § 105. Although bankruptcy courts have the discretion to award attorney's fees pursuant to its equitable authority contained in 11 U.S.C. § 105(a), this Court agrees with Hammer Financial that § 105 does not apply in the context of this matter. The motion to strike attorney's fees is therefore granted.
III. Breach of Fiduciary Duty (Count IV)
In Count IV of their Complaint, the Reeses allege that Hammer Financial and Joseph Hammer violated their fiduciary duty as the Reeses' agents and brokers by inducing and advising plaintiffs to enter into the transaction when it was not in their financial interests to do so. (Compl.¶ 43.) Hammer Financial and Joseph Hammer move to dismiss the Reeses' breach of fiduciary duty claim.
In the motion to dismiss, Hammer Financial and Joseph Hammer contend that the Reeses have not plead any facts from which a fiduciary relationship arises. This Court disagrees that the Reeses have failed to allege the existence of a fiduciary duty. Indeed, a similar argument was recently rejected by a court in this district. See DeLeon v. Beneficial Constr. Co., 55 F.Supp.2d 819 (N.D.Ill.1999). In DeLeon, the court stated:
In Illinois, when one party undertakes to find financing on behalf of another, a principal and agent relationship is created. An agent owes fiduciary duties to his principal as a matter of law.... It is undisputed that plaintiffs engaged the defendants to conduct mortgage brokerage services and a fiduciary duty was thereby created.
Id. at 827-28 (citing Allabastro v. Cummins, 90 Ill.App.3d 394, 413 N.E.2d 86, 87-88 (1st Dist.1980)).
The Reeses' fiduciary duty claim meets the Rule 12(b)(6) standards. The Reeses allege that: (1) by undertaking a loan for the Reeses, Hammer Financial and Joseph Hammer became the Reeses' agents and mortgage brokers (see Compl. ¶ 12); (2) Hammer Financial and Joseph Hammer violated their fiduciary duty as the Reeses' agents and brokers by inducing and advising the Reeses to enter into the transaction when it was not in their financial interests to do so (id. ¶ 43); and (3) they were damaged by such breaches (id. ¶ 45). These allegations sufficiently set forth a breach of fiduciary duty claim.
*5 Joseph Hammer additionally contends that the claim for breach of fiduciary duty against him, individually, should be dismissed. Illinois grants corporate officers and directors a conditional privilege that protects them from personal liability for their decisions made on behalf of the corporation. See Stafford v. Puro, 63 F.3d 1436, 1442 (7th Cir.1995). Still, corporate officers are liable for torts if they "participated in the conduct giving rise to that liability." Itofca, Inc. v. Hallhake, 8 F.3d 1202, 1204 & n. 6 (7th Cir.1993) (quoting Prince v. Zazove, 959 F.2d 1395, 1401 (7th Cir.1992)).
The Reeses have stated a valid claim against Joseph Hammer individually for breach of fiduciary duty. The Reeses allege that Joseph Hammer is the sole corporate officer of Hammer Financial and that all acts attributed to Hammer Financial were carried out by Joseph Hammer. (See Compl. ¶ 5.) The Reeses additionally allege that Joseph Hammer participated in arranging the loan which spawned fiduciary obligations. (Id. ¶ ¶ 12, 43.) In short, because the Reeses allege that Joseph Hammer was a corporate officer who participated in the conduct giving rise to a breach of fiduciary duty, his motion to dismiss is denied.
IV. Consumer Fraud Claim (Count III)
In Count III of their Complaint, the Reeses allege that Defendants engaged in unfair or deceptive acts and practices in violation of § 2 of ICFA. In order to state a claim under the ICFA, a plaintiff must allege: (1) a deceptive act or practice, (2) an intent by the defendant that the plaintiff rely on the deception, and (3) that the deception occurred in the course of conduct involving a trade or commerce. See Thacker v. Menard, Inc., 105 F.3d 382, 386 (7th Cir.1997). In the motion to dismiss, Hammer Financial and Joseph Hammer assert that they have not engaged in any deceptive act or practice, reiterating the arguments discussed above. This Court has rejected those arguments and finds that the Reeses have adequately plead deceptive acts or practices under ICFA. The motion to dismiss the ICFA count is therefore denied. [FN5]
FN5. As he did with respect to the breach of fiduciary duty claim against him individually, Joseph Hammer argues that the ICFA claim against him personally should be dismissed. ICFA clearly provides that "any person" may be sued under its provisions, including "any agent, employee, salesman, partner, officer, director, member, [or] stockholder" of a corporation that is also being sued. 815 ILCS § 505/1, 10(a). In addition, many cases have permitted officers to be named as individual defendants under ICFA, where they were personally involved in the activities which gave rise to the cause of action. See Garcia v. Overland Bond & Inv. Co., 282 Ill.App.3d 486, 496, 668 N.E.2d 199, 206 (1st Dist.1996); People ex rel. Hartigan v. All Am. Aluminum & Constr. Co., 171 Ill.App.3d 27, 35, 524 N.E.2d 1067, 1072 (1st Dist.1988). As explained supra at pp. 12-13, the Reeses have sufficiently plead that Joseph Hammer participated in the alleged deceptive acts or practices giving rise to the ICFA claim. For this reason, Joseph Hammer's motion to dismiss the ICFA claim against him individually is likewise denied.
CONCLUSION
For the reasons stated above, Hammer Financial and Joseph Hammer's motion to dismiss is denied. Hammer Financial's motion to strike the Reeses' claim for attorney's fees in Count II is granted.
