In the United States Court of Federal Claims

NOT FOR PUBLICATION

No. 14-1176C

(Filed: July 10, 2015)

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SHANNA CLEWLEY and COLT

CLEWLEY

Plaintiffs,

v.

THE UNITED STATES,

Defendant,

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Rule 12(b)(1); Rule 12(b)(6);

Rule 9(k); Jurisdiction; Failure

to state a claim upon which relief

can be granted; Breach of duty

of good faith and fair dealing

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OPINION

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BRUGGINK, Judge.

In their complaint, plaintiffs allege that the United States breached its

contractual duty of good faith and fair dealing. Pending before the court is

defendant’s motion to dismiss under Rules 12(b)(1) and 12(b)(6) of the Rules

of the United States Court of Federal Claims (“RCFC”). The motion has been

fully briefed, and we deem oral argument unnecessary. As more fully

explained below, we grant the motion to dismiss in part and give plaintiffs

leave to file an amended complaint.
BACKGROUND

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In 2005, the Rural Housing Service (“RHS”), an agency within the

United States Department of Agriculture (“USDA”), loaned $174,890 to

plaintiffs to facilitate the construction of a single-family home in Florissant,

Colorado, pursuant to Section 502 of the Housing Act of 1949. 42 U.S.C. §§

1441-1490t (2012). To receive the loan, plaintiffs signed a series of

documents that consisted of a promissory note, deed of trust, subsidy

repayment agreement, and a payment assistance/deferred mortgage assistance

agreement (the “loan documents”). After the house was completed, plaintiffs

moved in and discovered numerous construction defects, such as faulty

plumbing, protruding screws and nails, a leaky bathtub, and mold spreading

throughout the property. Over the nextsix years, plaintiffs made their monthly

payments despite the condition of their home.

In the spring of 2011, plaintiffs’ monthly payments increased beyond

what they could afford. Plaintiffs requested a lower monthly payment amount,

but RHS refused. Plaintiffsstopped meeting their monthly mortgage obligation

in October 2011. In January 2012, RHS denied plaintiffs’ request to restart

their monthly payments and demanded that the loan be brought current in one

lump sum, as was RHS’s prerogative under the provisions of the loan

agreement. Unable to pay the lump sum, plaintiffs sold their home for

$101,000 in March 2012, roughly $85,000 less than the remaining mortgage

balance.

Plaintiffs allege that they received oral assurances from an unnamed

individual at RHS prior to that sale that the remainder of their debt would be

forgiven if they closed the short sale and completed an application to settle

their loan. Plaintiffs promptly submitted the application. RHS did not

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respond to plaintiffs’ application for debt settlement. In a letter dated June 19,

2012, RHS agreed to release its mortgage lien on the property to allow the sale

to close, but reminded plaintiffs that they remained responsible for the

The facts in this opinion are drawn primarily from the complaint and from the

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loan documents attached to defendant’s motion to dismiss.

Plaintiffs’ complaint does not specifically identify when this communication

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occurred. Given that plaintiffs submitted the documents requested by RHS “on

or about June 9, 2012,” we assume the communication occurred during the

Spring of 2012. See Compl. 5.

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outstanding balance owed. On July 10, 2012, the sale of plaintiffs’ home

closed with no objection by RHS. During the ensuing fifteen months,

plaintiffs received no communication from RHS.

Around October 2013, plaintiffs attempted to purchase a home in South

Dakota. Before the closing of the sale, however, the USDA disclosed to credit

reporting agencies that plaintiffs were still in debt to RHS, behind in their

payments, and subject to a lien of foreclosure, which prevented plaintiffs from

closing on the new home. Plaintiffs inquired about the status of their

application for debt settlement from June 2012, and RHS instructed them to

resubmit the application. In response to this new application, RHS countered

with an offer to lower the amount owed from $79,713.31 to $59,784.98.

Plaintiffssent a counteroffer in February 2014 to which RHS never responded.

Plaintiffs sent the same counteroffer again in May 2014. In June 2014, RHS

provided another offer of settlement, which plaintiffs did not accept.

In July 2014, plaintiffs requested a formal determination on their

original application for debt settlement and sought information on how to

appeal any adverse decision. The complaint does not mention whether RHS

ever responded to this inquiry. Plaintiffs instituted the present action on

December 8, 2014. Plaintiffs allege that defendant breached a contractual duty

of good faith and fair dealing through a series of actions, including “failing to

timely respond to Plaintiffs’ request for debt settlement” and “making

misrepresentations to the credit reporting agencies regarding Plaintiffs’

financial condition.” Compl. 8. On February 6, 2015, defendant filed a motion

to dismiss for lack of jurisdiction and failure to state a claim for which relief

can be granted.

DISCUSSION

The necessary threshold inquiry in any case is whether we have

jurisdiction over the claims presented. Steel Co. v. Citizens for a Better Env’t,

523 U.S. 83, 94-95 (1998). If we find jurisdiction, we then determine whether

plaintiffs have stated claims upon which relief can be granted. A mere

“formulaic recitation of the elements of a cause of action” is insufficient to

survive a motion to dismiss under Rule 12(b)(6). See Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 555 (2007). Rather, “the complaint must allege facts

‘plausibly suggesting (not merely consistent with)’ a showing of entitlement

to relief.” Cary v. United States, 552 F.3d 1373, 1376 (Fed. Cir. 2009)

(quoting Twombly, 550 U.S. at 557).

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In considering a motion to dismiss, “the allegations of the complaint

should be construed favorably to the pleader.” Scheuer v. Rhodes, 416 U.S.

232, 236 (1974); Hamlet v. United States, 873 F.2d 1414, 1416 (Fed. Cir.

1989). We assume that the plaintiff’s undisputed factual allegations contained

within the complaint are true. Miree v. DeKalb Cnty., 433 U.S. 25, 27 n.2

(1977); Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 747 (Fed.

Cir. 1988). Plaintiff bears the burden of proving that the court has subjectmatter jurisdiction, and we may consider evidence outside the pleadings in

deciding the issue. Reynolds, 846 F.2d at 747-48.

In its motion to dismiss, the United States argues that this Court lacks

jurisdiction because plaintiffs have failed to pursue a remedy through the

administrative review procedures mandated by the Federal Crop Insurance

Reform and Department of Agriculture Reorganization Act of 1994 and its

implementing regulations. See 7 U.S.C. §§ 6991, 6999 (2012) (the

“Reorganization Act”). Because plaintiffs received an “adverse decision”

from RHS, plaintiffs are required to appeal that decision administratively

before seeking judicial review in a district court. Id. § 6999. Thus, according

to defendant, plaintiffs’ claim is premature, and even if it were not, it is in the

wrong forum. Finally, defendant argues that plaintiffs’ claim based on the

USDA’s misrepresentation to the credit reporting agencies is a tort claim,

outside the jurisdiction of this Court.

Assuming the Court does have jurisdiction, defendant argues that

plaintiffs have failed to plead the existence of a contractual duty breached by

the government. Plaintiffs’ application for debt settlement is not a contract;

at most, it is an offer by plaintiffs that was never accepted by RHS, reasons

defendant. Defendant cites the series of offers and counteroffers between

plaintiffs and RHS to show that the parties never reached agreement, and, even

if the loan documents constituted a contract, RHS breached none of its

provisions. In the absence of any identified contractual obligations, defendant

argues that plaintiffs’ claim of a breach of the implied covenant of good faith

must be dismissed. Defendant also argues that plaintiffs’ failure to expressly

identify provisions of the contract in their complaint violates Rule 9(k).

Plaintiffs respond that the administrative review procedures contained

within the Reorganization Act are not applicable because plaintiffs are not

challenging an “adverse decision.” Instead, they are challenging RHS’s

“wrongful conduct” throughout the course of the parties’ relationship.

According to plaintiffs, a contract was formed after they submitted their

original application for debt settlement following the short sale. Plaintiffs

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allege that the fifteen months of silence by RHS was an acceptance of

plaintiffs’ offer and the $101,000 from the short sale served as the

consideration. Furthermore, plaintiffs point to the original loan documents

themselves as constituting a contract between plaintiffs and RHS.

Plaintiffs also reject the argument that their allegations concerning the

misrepresentation to the credit agencies are tortious. Id. at 19. They maintain

that a tort claim that is the result of a breach of contract is ultimately a contract

claim within the jurisdiction of this Court. See Kenney Orthopedic, LLC v.

United States, 88 Fed. Cl. 688 (2009). Given the existence of a contract,

plaintiffs argue that the USDA’s disclosure to the credit reporting agencies and

its repudiation of its oral assurances to forgive plaintiffs’ debt were a breach

of the covenant of good faith and fair dealing. Plaintiffs also argue that the

proper remedy for noncompliance with Rule 9 is to allow them to amend their

complaint rather than dismissing the case.

I. Jurisdiction

The Housing Act of 1949 and the Reorganization Act authorize RHS

to provide financing to rural homeowners. 7 U.S.C. §§ 6901-7035; 42 U.S.C.

§§ 1471-1490t. The program furnishes mortgage payment assistance to

families at qualifying low-income levels. Under the terms of the

Reorganization Act, a participant may appeal an “adverse decision” by RHS

via the administrative review process specified within the statute. 7 U.S.C. §§

6995-99. Judicial review of this administrative appeals process is limited to

district courts. Id. § 6999.

An “adverse decision” is defined as an “administrative decision made

by an officer, employee, or committee of an agency that is adverse to a

participant. The term includes . . . the failure of an agency to issue a decision

or otherwise act on the request or right of the participant.” Id. § 6991(1).

Section 6912 mandates that “a person shall exhaust all administrative appeal

procedures established by the Secretary or required by law before the person

may bring an action in a court of competent jurisdiction.” Id. § 6912(e).

Judicial review is limited to only the district courts. See 7 U.S.C. § 6999.

Although plaintiffs argue that they are not seeking review of an

“adverse decision,” the complaint alleges that defendant “fail[ed] to timely

respond to Plaintiffs’ request for debt settlement.” Compl. 8. That allegation

certainly falls within the statute’s definition of an “adverse decision.” See 7

U.S.C. § 6991(1). To the extent that plaintiffs’ complaint seeks a review of

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RHS’ decisions, the complaint is within the exclusive jurisdiction of the

district courts.

Furthermore, actions sounding in tort are explicitly excluded from this

Court’s jurisdiction. 28 U.S.C. § 1491(a)(1) (2012). Plaintiffs’ allegations

regarding the “wrongful conduct” of the agency throughout the parties’

relationship, and specifically that the USDA “made misrepresentations to the

credit reporting agencies,” are primarily tort claims. Compl. 8. Thus,

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plaintiffs’ claims regarding tortious conduct,standing alone, are not within the

Court’s jurisdiction and must be dismissed.

However, plaintiffs are correct that their complaint lies within this

Court’s jurisdiction to the extent it alleges a contract claim. See 28 U.S.C. §

1491(a)(1). Plaintiffs allege the existence of two contracts with RHS, at least

one of which–the mortgage itself–is uncontroverted. Breach of the duty of

good faith and fair dealing is a contract claim, and this duty is “implied in

every government contract.” Detroit Hous. Corp. v. United States, 55 Fed. Cl.

410, 417 (2003).

II. Failure To State A Claim

Defendant argues that plaintiffs have failed to identify a specific

contractual obligation necessary to sustain a claim for breach of the duty of

good faith and fair dealing. Defendant points to several provisions of the

original loan agreement and supporting documentation, which it attached to

support its motion to dismiss, to show that defendant did not have a duty to

forgive plaintiffs’ debt. Defendant argues that the implied duty of good faith

and fair dealing cannot expand the scope of the parties’ duties to one another

and that the duty of good faith must be linked to a substantive, express

obligation under the contract. Defendant also argues that plaintiffs have not

alleged a specific intent to injure plaintiffs or malice on the part of any RHS

officials, which is required for a breach of the duty of good faith and fair

dealing.

We begin by noting that we cannot consider documents outside of the

pleadings when resolving a motion to dismiss under Rule 12(b)(6). RCFC

We recognize plaintiffs’ argument that a tort which stems from a breach of

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contract is ultimately a contract claim. The validity of this position will

depend on the allegations made in the amended complaint.

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12(d). Defendant attached loan documents to its motion. This problem,

however, is caused, as defendant pointed out in its reply brief, by plaintiffs’

failure to meet the specificity requirements of Rule 9 by failing to “identify the

substantive provisions of the contract or treaty on which the party relies” or by

simply attaching the contract to the complaint. RCFC 9(k). Defendant is

correct that the breach of good faith and fair dealing is not a “substantive

provision” within the meaning of Rule 9.

Looking solely at the complaint, plaintiffs have alleged the existence

of two contracts: the original loan agreement and the “Short Sale Agreement.”

Compl. 2, 5. The only contractual cause of action alleged in the complaint is

one for a breach of the implied covenant of good faith and fair dealing.

Although this cause of action assumes the existence of positive contractual

provisions, plaintiffs must identify those provisions for the duty of good faith

and fair dealing to attach. Detroit Hous. Corp., 55 Fed. Cl. at 417. Plaintiffs’

complaint is currently deficient in this regard.

However, the remedy for this deficiency is not yet to dismiss the

complaint. Rule 9 notwithstanding, the rules contemplate notice pleading,

rather than fact pleading, Bell, 550 U.S. at 5. According to the Court’s rules,

we should “freely give leave [to amend the complaint] when justice so

requires.” RCFC 15(a)(2); see also Gonzalez-McCaulley Inv. Group, Inc. v.

United States, 93 Fed. Cl. 710, 717 (2010) (allowing the plaintiff to amend its

complaint to remedy failure to plead with specificity under Rule 9(k)). We

will allow plaintiffs to amend their complaint. Plaintiffs have alleged the

existence of two contracts and at least some conduct which they believe was

a breach of one or both of those contracts. The complaint is thus not so

lacking as to warrant dismissal at this juncture. The amended complaint must

meet the particularity requirements of ule 9, however, and plaintiffs will be

well served to plead the elements of each contract they allege was breached

and to identify the provisions that were breached. Failure to do so may result

in dismissal.

CONCLUSION

As explained above, defendant’s motion to dismiss for lack of

jurisdiction is granted as to plaintiffs’ claims for review of RHS’ actions under

the applicable statutes and granted as to plaintiffs’ claims for tortious conduct

apart from a breach of contract. The motion to dismiss is denied without

prejudice as to plaintiffs’ breach of contract claims. We grant plaintiffs leave

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to file an amended complaint to plead their contract claims with more

specificity. Accordingly, the following is ordered:

1. The clerk of court is directed to dismiss those portions of plaintiffs’

complaint not alleging a breach of contract.

2. Plaintiffs are directed to file an amended complaint on or before July

31, 2015.

3. Defendant is directed to answer or otherwise respond to the

amended complaint on or before August 28, 2105.

s/ Eric G. Bruggink

ERIC G. BRUGGINK

Judge

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